Anyone who has been trading for very long has certainly heard the phrase “buy low, sell high.” This classic mantra, when applied correctly, is the surest way to consistently exit positions at a higher level than you entered into them—thus earning you a profit.
However, in order to do this, traders need to understand exactly where the “high” and “low” marks actually exist. One of the most popular methods for identifying this range is by looking at a stock’s 52-week high and low marks. The purpose of this article is to tell investors how to identify stocks at their 52-week lows, describe the benefits of trading these stocks, and offering trading strategies for doing so.
What Are 52-Week Low Stocks?
Over the course of a year, all stocks will move within some measurable price range. While some price ranges will be quite wide, others (such as mature, blue-chip stocks) will be contained within a more predictable range.
52-week lows are a list of stocks that are currently trading for a price that is lower than anything they’ve experienced over the course of the past year. While investing in 52-week Low stocks will sometimes be quite risky, these stocks often present a very strong profit potential.
Understanding the Significance of 52-Week Low Stocks
When trading stocks that are near their 52-week low mark, investors need to know which stocks are experiencing cyclical lows and which stocks have actually lost a significant portion of their value. In order to determine whether a stock is likely to move in a positive or negative direction, most traders will use a vast set of technical and fundamental trading indicators. Looking at a stock’s 52 week high can help you get an even more thorough understanding.
Most of today’s best 52-week low stock trading strategies involve a combination of opening short and long positions. When stocks cross the low water mark with significant downward pressures, many traders will short these stocks hoping that the true bottom will be even lower.
In order to protect yourself from certain investing and trading risks, it’s crucial to use a stock reader that specifically makes it easy to read the 52 week low. You may also want to use a list of the biggest stock losers today.
Stocks trading can often be rather difficult, but using lists such as these can be very useful. Furthermore, looking at the 52-week high price—and calculating the total yearly price range—can help you get a more comprehensive understanding of the stock is (relatively) performing. Some stocks will move between their high points and low points multiple times within a month. These volatile stocks are both risky and rewarding. In other situations, especially in mature markets, stocks will remain towards either the top or the bottom of their price channel for extended periods of time.
What Are the Benefits of Trading 52-Week Low Stocks?
The primary benefit of trading a stock near its 52-week low is the opportunity to for rapid stock price appreciation. For a trader this means the opportunity to make a more profitable trade. Here’s an example that will make this opportunity clear.
Suppose that a stock is currently trading for $100 on January 1, and by the end of the year, it is trading for $110. When all else is equal, holding the stock for one year produces a 10 percent return on investment, which—for many people—is often considered to be quite acceptable.
However, imagine if this stock had swung violently over the course of the year, trading as low as $50 on July 1. In this scenario, if a trader had the audacity to enter into a position at $50 on July 1, by the time the stock rose to its $110 high at year’s end, the courageous trader would have earned a 120 percent ROI in just six months. Clearly, the one who trades at the right time—whether trading small stocks or large stocks—is the one who comes out on top.
In the example above, both traders end up in the black, but one earns a much larger profit than the other—and in less time. 52-week low stock traders are the ones who know that these sorts of situations play out in the real world all the time. They know that markets are often overly dramatic, which is why bearish stocks will typically go “too far” before they reverse their momentum and begin producing strong returns.
52-week stocks also often have a limited downside—the stock market has already reacted and has “punished” these stocks for whatever it is they did wrong. At the very least, relying on (or at least taking a serious look at) the 52-week low mark can help you determine which stocks are currently selling for a bargain. Many of the best growth stocks have experienced the exact pattern described above.
What Are the Risks of Trading 52 Week Low Stocks?
The primary risk of trading 52 week low stocks is that it could indicate that the stock is a falling knife. This means that not only is the stock worth less than it was in the past, but it is likely to be worth even less in the not-so-distant future.
This tracks with one of the most common fallacies held by modern investors. That is a belief that all stocks will eventually turn things around and get better. Unfortunately, we do not live in such a fairy tale world. Many stocks that have lost their value will never get it back. Companies do fail and stocks continue to fall—sometimes these falls can last for years or even more.
As these stocks continue to drop, establishing a new 52-week low with each passing trading period, it can be tempting to double down and increase your position even further. After all, if the stock was a “good deal” when it was trading at $100, then it can look like an even better deal when it is trading at $80 just one week later. Doubling down can decrease your average cost per share (in this case, lowering it from $100 to $90), which will subsequently lower the movement you need in order to break even. But at the same time, you are standing to risk even more. If the stock continues to fall to $70, the total position will be a $40 loss, rather than a $30 loss.
If you invest in stocks just because they are at their 52-low mark, you will be forced to endure these losing positions on a fairly regular basis. Doing this does create financial risk. However, this doesn’t mean the 52-week low price isn’t useful when comprehensively evaluating a prospective position.
Trading Strategies for 52-Week Low Stocks
As you might expect, there are plenty of different trading strategies that can be used while trading 52-week low stocks. The approach you use will be much different than it would be if you were using a dividend investing strategy, focused primarily on dividend yield. Some of these strategies include:
- Looking for signs of support and resistance – these can help you determine where a stock’s “true” bottom might be.
- Using short-term trading strategies, such as day trading or swing trading – these allow you to benefit from regular market volatility, rather than depending on organic growth.
Regardless of the approach, you end up using, it’s a good idea to practice your 52 week low stocks trading strategies on paper before risking any real capital.
When engaging in any sort of high-risk, high-reward trading strategy, it’s crucial to take active measures to minimize your exposure to risk. Luckily, there are several different ways that investors can do this without eliminating the possibility of earning strong returns.
- Use Technical Indicators - Looking at moving averages, the Ichimoku Cloud, and the relative strength index (RSI) will help you predict where prices are likely. With channel strategies such as this one, Bollinger Bands are also quite helpful. You should also consider looking at the simple moving average, earnings per share, average volume, free cash flow, and anything else you deem to be relevant.
- Diversify - By opening many different positions, you reduce the risk attached to each stock.
- Utilize the Full Price Chart - Beyond just looking at the low and high points from the past year, you should also look at factors such as trading volume, percent change, and range changes over time.
- Choose the Right Type of Stocks - To put it simply, some stocks are good candidates for 52 week low trading while others are not. Look for stocks that are younger, growth stocks, and the most volatile stocks. These are the stocks that are more likely to bounce back from their 52 week low.
Should You Buy a Stock at Its 52-Week Low?
The answer to this question will inevitably depend on a wide range of different factors. It is probably unnecessarily risky to always buy a stock once it has reached its 52-week low—there is no denying that many of these stocks will end up moving even lower. However, there will also be plenty of circumstances where 52-Week Low Stocks quickly increase in value. Because many of these stocks are returning to their yearly mean value, they can experience large gains in a short amount of time. Only with a carefully crafted and tested trading strategy can you identify which of these stocks are actually best.
Fortunately, developing a 52-week low trading strategy is much easier than many people initially assume. Because you have already chosen your preferred indicator—the 52-week low line—your main concern is determining when it is appropriate to respond when a stock reaches a new low. Doing things such as monitoring cash flow, paying attention to stock exchange movements, and tracking the moving average can also be quite helpful.
Some Final Thoughts on 52-Week Low Stocks
Regardless of your preferred trading methods, the easiest way to reduce the risk of trading stocks near their 52-week low mark is to remove the risk of the unknown. If a stock is experiencing a low point and is moving in a bearish direction, you should naturally be a little bit skeptical. After all, there must be some reason that other holders of the stock are willing to sell. These reasons could include:
- There was a recent earnings announcement that failed to meet expectations.
- The stock market, as a whole, is experiencing the onset of a recession.
- A single trading party decided to exercise a large call or flood the market with many shares.
In order to profit from 52-week low stocks, you must identify which affordable stocks are trading at an appropriate price and which ones are undervalued. This requires a delicate balance of gauging the market’s overall financial sentiment, using other technical indicators, and determining the driving forces behind the stock’s current price trends.
By using the 52 week low indicator, you can determine which stocks might be underpriced and are likely to increase in value. Strong financial gains are well within your reach, even if the market is not moving in a bullish direction. Though this indicator alone will require additional analysis in order to be truly effective, it is certainly one of the most useful—and accessible—indicators currently in use.
