Buying New Highs: Why the Hardest Trade Is Often the Right One
Few things feel more counterintuitive in trading than buying into uncharted territory. Whether it’s a stock breaking into uncharted territory or a broad index hitting another all-time record, the little voice in the back of your head will more often than not tell you it’s the wrong thing to do – that it’s too late – that it’s all over and you have missed the boat. If this comes after a series of trades that resulted in losses, these misgivings are often amplified by your brain telling you that you have made a mistake again and that you should have already been in the move.
What has prompted this is that several indices are either making new all-time highs or are nudging up against them. The prime example of this is the FTSE 100 – so long a dog among European indices, it has reached a new all-time high.
I posted the chart below on our forums this morning, and I can guarantee that many of our traders will be remarkably hesitant to buy something that makes a new high. Our psychological make-up and cultural programming rebel against buying things that are going out of value. This is one of the reasons trading is so difficult.
The Evidence for Buying Highs
Contrary to common belief, buying strength isn’t a reckless act. Decades of research have shown that new highs, on average, serve as jumping-off points for further gains.
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The 52-Week High Effect: Academic research on individual equities indicates that stocks trading near their 52-week high tend to outperform. Investors anchor on past prices and under-adjust to new information, leaving persistent upside.
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Time-Series Momentum: When you zoom out to indices and futures, the same principle holds. Studies spanning over a century reveal that assets with positive trailing returns tend to continue climbing. This “trend-following” effect has been observed across equity indices, commodities, currencies, and bonds in every decade since the late 1800s.
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All-Time Highs Aren’t Dangerous: Event studies on the S&P 500 and MSCI World indices find that forward returns after hitting record highs are indistinguishable from (and sometimes better than) average. A record high, statistically speaking, is not a danger signal. In fact, some research shows that levels set at new highs often become “floors” never breached again.
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Proximity Matters: Evidence from G7 stock indices suggests markets closer to their historical highs generate more substantial subsequent returns than those languishing far below old peaks. Weakness tends to persist just as strength does.
Taken together, the academic and practitioner evidence is clear: buying highs is not a gambler’s fallacy—it is a disciplined way of aligning yourself with established momentum.
I have dropped a table of the key findings for this in the table below –
The Psychological Challenge (The Really Important Bit)
If the data is blindingly obvious, why do most traders hesitate? The barrier isn’t logic—it’s emotion.
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Loss Aversion: Buying a breakout feels like buying at the worst possible price. If the market pulls back even slightly, it feels like a personal mistake.
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Fear of Missing Out (FOMO): Ironically, the same trader who can’t bring themselves to buy the high is tortured if the move continues without them. This tension between caution and envy erodes discipline.
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Ego Protection: Many traders avoid new highs because they don’t want to appear naïve—“only amateurs buy the top.” The ego prefers to look clever, catching bottoms rather than being humble enough to ride trends.
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Anchoring: We instinctively compare today’s price to a lower reference point in the past, convincing ourselves that value lies only in retracements. But value in markets is not absolute—it’s relative to where price wants to go next.
How to Manage the Inner Battle
Success comes from reframing buying highs not as a reckless act but as a rules-based decision inside a system. Some practical ways to manage the psychological drag include:
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Systemise the Entry: Define your rules in advance—“buy a 252-day closing high when the 200-day moving average is rising.” When the signal comes, you act, no debate.
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Normalise with Risk Units: Think in terms of R (risk units), not dollar amounts. This distances you from the emotional sting of buying “expensive.”
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Trail with Discipline: Use ATR-based stops or volatility-sensitive trailing exits. Knowing risk is defined calms the fear of “buying the top.”
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Diversify Across Indices: Apply the same rules to multiple markets, such as the S&P 500, STOXX 600, Nikkei, ASX 200, and MSCI World. Diversification reduces the psychological burden associated with any single trade. However, this is becoming harder as correlations tend to shrink during bull markets.
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Reframe the Narrative: Instead of asking “What if it collapses from here?”, ask “What if this breakout is the start of the next leg up, and I sit paralysed on the sidelines?”
The historical record is unambiguous: markets that make new highs are not inherently fragile. More often than not, they’re demonstrating underlying strength. The true challenge isn’t statistical—it’s psychological. To trade breakouts well, you must tame the instinct to look smart, silence the ego that whispers “too late,” and commit to a system that allows you to participate in the very trends that drive wealth creation.
In the end, buying new highs isn’t about chasing. It’s about parking your ego and aligning with reality.
