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www.breakoutwatch.com January  16, 2017

How to Trade Cup and Handle Stocks for Optimal Return

For the optimal return (best profit at least risk) from breakouts from our cup with handle watchlist, I now recommend the following trading strategy:

  1. Determine the amount of your portfolio that you will trade on cup and handle pattern stocks.
  2. Determine the number of positions you wish to hold and allocate an equal amount of your portfolio to each position. I suggest 2 positions with a 50% allocation(1). This is your portfolio management plan.
  3. Each day, before the market opens, create a list of cup and handle pattern stocks that satisfy these conditions:Cup and Handle Chart Pattern Watchlist Filters
    • RS Rank must be at least 95 (this selects stocks with price gains in the top 95 percentile over the last 12 months. It is a proxy for momentum)
    • Industry Rank must be in the top 50 percentile (i.e. have a rank less than 111 in our industry ranking scheme)
    • 50 day average daily volume >= 100,000
    • Quarterly Earnings Growth Acceleration score >= 2/10 (CEF3) (see CANTATA Scoring)
    • Last Close <= $12 (lower priced stocks have a higher probability of better returns)
    • You can create this list of stocks on our Cup and Handle Chart Pattern watchlist using the filter settings shown at right.
  4. Now:
    • Check the market trends published each day on our Monitor > Market Analysis page or in our daily email
    • If market trend is positive, prepare to buy on alert the stocks that are on the shortlist you created using the filters shown at right. When you receive an alert meeting the above criteria place an order with a stop limit 5% above the breakout price (BoP).
    • Only buy if you have a position open in your portfolio management plan.
    • At the end of the session, review your purchase(s) and sell at the next open if the closing price is less than BoP or volume at end of breakout day is less than 1.25 times average 50 day volume
    • Monitor the closing price each day and set a trailing stop at 10% below the highest close since breakout. This will require resetting the trailing stop each time the stock makes a new high.
    • Sell if trailing stop is met intra-day (you can do this with a sell stop order if you are unable to monitor the market).
    • Other than setting the daily stop loss as described, you do not need to fret over when to sell the stock because sooner or later you will be stopped out of your position by the trailing stop. Hopefully, your capital has increased but if not, do not despair, some drawdown is inevitable as not every position you open will be a winner. In fact, your win % may be as low as 6 out of 10 on average, but your stop loss strategy will minimize your losses.
    • After a  sale, wait for the next alert that meets your filter values. This suggested strategy is designed to minimize your drawdown and as of September 30, 2015, the maximum drawdown was just 2.6%
(1). There will be very few stocks that meet these filter constraints, perhaps only 1-2 per watchlist. Of these, there may be no alerts in any session, so buying opportunities may not be presented every day. If you allocate more than two positions to your portfolio you will find that you are rarely fully invested so you will not maximize the potential return. You can see how  this works by playing  with the number of positions in our cup and handle pattern backtest tool.

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