Learn To Day Trade With The 52 Week Pop Strategy
Today I’m going to teach you a great momentum strategy. This is one of the first strategies I teach people who want to learn to day trade Stocks, Futures and Forex markets. One thing I observed over the years is markets tend to get volatile when they approach and break through the 52 week high/low price point.
The reason for this volatility is because the 1 year high/low area is the center of focus for many traders including professional hedge funds and mutual funds who put a lot of weight into the 52 week high/low price.
The Basis For The Set Up
A while back before the time when everyone had access to the Internet and traders were a bit less sophisticated, the 52 week high/low point was known as a breakout point where markets broke out and continued moving in the same direction with continued momentum.
With time as more traders caught on to this method to buy as well as sell near the 52 week high/low price, markets began demonstrating more and more false breakouts near this price level. As a result the 52 week high/low began losing all credibility as having any type of edge that could benefit traders or increase their odds of winning.
After several years of monitoring how markets behave near the 52 week high/low price levels, professional traders realized more often than not markets hit the 52 week high/low area and pulled back before once again approaching the area and breaking out with strong momentum the second time around.
To take advantage of this price action, I created a great day trading strategy that uses the 52 week high/low price points without subjecting me to the draw downs and pullbacks that occur near these price levels.
You want to start by finding Stocks, Futures or Forex markets that are touching the 52 week high/low price level. You want to find markets that are not edging slowly towards the 52 week level but are gravitating towards that level with increased volatility and momentum.
The more volatility and momentum you notice near these levels at least initially the better. In this example you will notice how the stock approaches the 52 week level like a magnet. You should also make sure the markets you pick have sufficient volatility under normal trading conditions; therefore you should pick your markets carefully.
Once the market hits the 52 week high/low level you should see an instant pullback away from that price range. The market should then take anywhere from 1 to 3 weeks to consolidate and try again the second time to break through the 52 week price high/low level.
In this example the stock quickly pulls back and consolidates for about 2 weeks before trying once again to reach for the 52 week high level.
As you monitor the market daily notice and keep track of the high that was made the day the market made the 52 week high/low price initially. Your job will be to enter an entry stop order each day $0.25 cents above that initial 52 week high/low price.
You only want to enter the order for the first hour of the trading day. The breakout that should follow should be very powerful and tends to occur near the opening bell. I rarely see breakouts that occur late in the day that have sufficient momentum to make the trade worthwhile. If you are not filled during the first hour of the trading day you should cancel your order ASAP.
You can see in this example how the stock gaps up and doesn’t turn back down. The volatility should be similar to what you saw during the first time the breakout occurred.
In this example you can see the entire trade progression from beginning to end. The entry occurs $0.25 higher than the 52 week price high. In this case the gap occurred at the opening bell and we were filled substantially higher than $0.25.
This is not something you should be too concerned with because usually momentum coming from gaps near the 52 week high levels tends to follow through similar to this example.
Once you are filled you need to place your stop loss order below the low that was made the day prior to your entry.
In this example you can see how the stock makes the initial 52 week low. This is when we begin monitoring the stock for the next 1 to 3 weeks to see if it pulls back up and goes for another try to break through the 52 week low level. I suggest you trade to the downside just as often as you trade to the upside.
The momentum is typically stronger and quicker to the downside as opposed to the upside the majority of the time.
In this example the stock only pulled back for 6 days. The pullback is usually quicker to the downside as well. Notice how the breakdown below the 52 week low was volatile and once again started with a small gap. The gap is not a necessity but you will see it often when trading this strategy. The second breakout below the 52 week low tends to carry strong momentum.
You can see the entire sequence of the trade to the downside. In this example I use two different stocks but the 52 Week Pop Strategy works just as well with Commodities, Futures and Currencies. I’ve been trading this strategy using Precious Metals and Currencies for over a decade with consistent results.
When trading the 52 Week Pop you should use 15 minute bar charts the day you intend to enter the market when trading stocks. For other markets I tend to use 5 minute bar charts but stocks respond well to 15 minute time frame. I always use the daily chart to isolate the pattern and make sure that it’s setting up correctly. Once the set up is correct and my order is entered I switch to the shorter time frame to make sure the pattern is developing accordingly.
My stop loss is placed a few cents below the low prior to your entry day breakout day. The market should never go back to this level if the trade is working out as planned. Also keep in mind that you should never enter the trade after the first hour of the day.
This method thrives on momentum so if the market doesn’t start out that way in the morning the odds are it won’t begin during the trading day. Lastly, make sure you keep the trade open till the end of the day to give yourself the highest odds of achieving maximum profit potential. For more on this topic, please go to: How To Learn Day Trading and Best Day Trading Strategies – Momentum Breakouts
Have a great day!
By Roger Scott