William O'Neil states that some of his top winning plays came from buying shares that has just broken out into new highs. I found it counter-intuitive to be buying shares at the extreme highs, but neverthelss this technique is advocated by many experts. I am just wondering what is the experience of traders who have done this, and does it really work? I tried to do this earlier in the year, but ran into the huge correction of mid May, and the few blue sky stocks I bought all swiftly ended up costing me money instead of giving me the large wins I was supposed to get. There is always this conflict between trying to buy low, as opposed to buy high. For example, some experts advocate never to long a stock unless it's price is above the 20 MA, and similarly for shorting, but studying charts tells me that in fact many times, good swing trades are done by taking longs when price is below the 20 MA and then unlosding when it moves up above the 20 MA, which is opposite of the expert advice I mentioned. Although the idea is to go in only when signs are 'clear', one sacrifices significant margins of safety to do this, it seems to me.
I cannot speak of a new high strategy for short term trading but I can for the longer term. I have found that stocks that make a (2-3 year) new high are more profitable than those that just make a 52 week high. You just buy and hold until the 150ma turns flat. This will normally keep you in the stock for the entire bull run.
It depends on what time frame your looking at and what your intended holding period is. If you want to buy a stock, but you look on daily charts, and its making new highs, then you look on a weekly chart, and the stock is in the early stages of a new uptrend, what do you do?.. For me, if a stock makes new highs on daily's, but the weekly looks good, I dont mind paying up, but expect a week or two of a following downtrend before the larger overall trend takes off.
Read trend following on stocks. The author beat the market buying all time highs. Mind you he had novel entry and position sizing that is not described in the paper. http://www.turtletrader.com/blackstar-funds.html
Many thanks for the replies. I learnt something new from all 3 answers from you gents. The link provided by Psytrade led to an illuminating article. I was suprised that the results in that paper were so favourable, and also was struck by the length of the time that the average run lasted using their 10 ATR stop exit strategy. Speaking of the 10 ATR stop that the used, it seems to me that this is a fairly wide stop, much larger than the 8% stop that O'Neil and a lot of other experts recommend to use. Is it really common practice to use such a wide stop? Stops is another area I've been trying to refine and that I've thought about a lot, but only lately starting to find some more detailed info on.
I think another thing you need to look out for is the overall market condition. If you were buying breakouts back in April/May they would be more risky than buying breakouts in October of last year or June/July of this year. The market was on a 6 month bullmarket/sideways bull market. Furthermore, RSI from the period of December -2005 to March -2006 was making lower highs while the market was making higher highs. This type of divergance can be a sign that the market is about to correct. You need to understand when is the right time to be buying and when is the right time to be selling. Although, there is nothing that says the market can not keep going up the longer the bull market has been in place the riskier putting on new buy positions will be. The time to be buying is when the market has made a correction, and what you want to look for are stocks that have heald up well during the correction/bear market. Just flip that around for shorts. Now lets take a look at the correction that happened from the beggining of may to the middle of July. In the Middle of May the RSI indicator hit and extremely low point and a small rally occured. From the middle of May to early june the market sold off and the RSI indicator was low again but made a higher low than the in May and another small rally occured. From the beginning of June to the Middle of July the market sold off and the RSI Indicator hit another low that was higher than the previous two lows. Divergance and a good sign that the correction might be over. During this time you should be looking for stocks that are holding up well and setting up so when the market turns you will be ready to put on new long positions. Hope this helps. I will add that the market I was talking about was the Nasdaq but you can do this with any benchmark you like.
O'Neill preaches to people that they have to have all the facets of his method, CANSLIM, in place to be effective. M is for market....has to be right market in order to trade....just buying "new highs" is not necessarily going to be successful if it is a bear market... I think of O'Neill like this: place a small bet on the horse in front at the quarter mile post....increase that bet as that horse increases his lead at the half-mile post.....go "all in" as he begins to pull away in the home stretch.... Zanger also trades this method basically.....pick the big winners and ride, Sally, ride.....don't get fancy... There are some interesting statistics on being in the market a relative small per centage of the time and yet making the most money......waiting...waiting....waiting for the right horse to ride. You do know the theory behind "buying new highs"?? SteveD
I had couple of extremely profitable trades riding the stock that maked an all-time high before market open, on pre-market on INET ECN, I used data.inetats.com site to find such stocks . The stratedy is to buy a stock that made all-time high on pre-market and has a huge pre-market volume compared to average volume(30). If stock made all-time high before market open on huge volume then it will ride even higher when market opened, when a lot of new traders come to market. I bough on market open and sold 1-1.5 hours after open. Alex