October 9, 2020

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Trading Strategy: The 52-weeks High Effect In Stocks

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According to a study concerning the 52-week highs and lows in price pattern and volume trend of stock investments, a correlation between market capitalization and market-beating earnings has been established when a particular stock crosses a 52-week high.

The 52-week high effect is essentially a parameter for investors. It helps one to compare the prevalent trading prices of stocks and bonds to the highest prices they had reached in the past 52 weeks. Such a comparison helps make an informed investment decision for generating substantial earnings. Notably, it also comes in handy at forecasting prices of stocks; something a registered depository participant may help traders with to some extent and may be among the top benefits of Demat account.

What is 52-weeks high?

The trading terminology ‘52-weeks high’ refers to the highest price at which a security has been traded over a period that is equivalent to a year. It is considered to be a technical indicator and is closely based on the daily closing price for the said security.

Usually, the 52-week high indicates a resistance level. Traders and investors often weigh in the said figure and consider it to be an essential factor for analyzing a stock’s immediate value. It also comes in handy in predicting the stock’s price movement in the future. 

Significance of approaching a 52-week high

As the 52-week high is a point of resistance set over the past week, some individuals refuse to buy or sell when a stock approaches the threshold. They also believe that the points signal the fall in the performance of stocks.

On the other hand, some believe it to be a viable opportunity to avail a stock through an online trading account as they hope for significant growth ahead due to a breach in the 52-week high threshold. 

Regardless, traders must understand that if stocks do not break through this 52-week high, it may be an indication of a significant decline. Perhaps one of the benefits of a Demat account with a registered depository participant is that it helps to understand these implications much better than the rest.

Impact of 52-week high on share price 

When a stock is moving towards a 52-week high or is currently trading, it signifies an upward trend. Typically, an upward-moving stock will continue to do so until it reaches a point of resistance.

The fact that the 52-week high is the most vital point of resistance that a said stock has been subject to over the last year, it may overwhelm some investors. It is mostly because of the common notion that stock prices tend to fall sharply after it has reached its resistance level. Subsequently, it gives rise to a psychological barrier that prevents individuals from buying shares.

Investors often fail to realize that stocks reach a high point due to improved sales, favorable prospects, and increased earnings. Also, at times the concern is so overpowering that investors whose shares are nearing 52-week high sell off a considerable percentage of stock to avoid loss.  

Collectively, these technical indicators tend to hold stocks down at the 52-week high limit. Regardless, the pause is often for a brief period if the company in question has garnered positive attention, and carries a robust market reputation.

Hence, it can be said that an increase in purchase and rise in gains that follow a bullish break is a result of 2 key factors, namely –

  1. Visibility
  2. Fear of missing out (FOMO)

Keeping these aspects in mind, individuals should make the most of a 52-week effect in stocks in their favor. Also, they should find out how they can align the benefits of a Demat account with stock trading and maximize their earnings successfully.

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