www.breakoutwatch.com January  5, 2018

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 strategies:

• Buy on Breakout for those able to monitor the market in Real Time
• Buy at Open for those unable to monitor the market in Real Time

Buy on Breakout

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. As winnings accumulate, always revalue your portfolio and continue with the allocation plan.
3. Each day, before the market opens, create a list of cup and handle pattern stocks that satisfy these conditions:
• breakout prediction model predicts close above BoP
• volume is equal to or greater than average volume.
• 50 day average daily volume >= 500,000
• Breakoutprice <= $12 (lower priced stocks have a higher probability of better returns using the breakout model)
• You can create this list of stocks on our Cup and Handle Chart Pattern watchlist using the filter settings shown at right. To set these filters, login to breakoutwatch.com and navigate to Mine for Candidates > Long Positions > Cup-with-Handle
• This set of filters is quite restrictive and there will be times when no stocks meet the criteria. If so, and you still wish to search for candidates, you can lower the RS Rank threshold and/or increase the last close limit.
• After saving your filters, set your Alert Preferences to receive alert only on stocks meeting your filter criteria by navigating the menu to Account Managemt > Alert Preferences and setting them like this:
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). Even if the breakout price was not exceeded at the close, and/or the volume for the day was below the average volume, hold the position.
• Monitor the closing price each day and set a trailing stop at 7% 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.

In 2017, this strategy could have earned 71%, excluding brokerage fees and slippage. This can be verified using our cup and handle pattern backtest tool.

^{(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.}

Buy at Open

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. As winnings accumulate, always revalue your portfolio and continue with the allocation plan.
3. Each day, after the market closes, create a list of cup and handle pattern stocks that satisfy these conditions:
• The stock must have closed above its breakout price
• Daily volume must be at least equal to the 50 day average volume
• RS Rank must be at least 92 (this selects stocks with price gains in the top 92 percentile over the last 12 months. It is a proxy for momentum)
  
• 50 day average daily volume >= 1,000,000 (this selects mostly large cap stocks that are of most interest to institutions)
• In this strategy, there is no limit to the breakout price.
• You can create this list of stocks on our Cup and Handle Chart Pattern watchlist using the filter settings shown at right.
• After saving your filters, set your Alert Preferences to receive alert only on stocks meeting your filter criteria by navigating the menu to Account Managemt > Alert Preferences and setting them like this:
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, place a market order to buy at the next open with a stop limit 5% above the breakout price (BoP).
• Only buy if you have a position open in your portfolio management plan.
• Monitor the closing price each day and set a trailing stop at 7% 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 time the above conditions are met.

During 2017, this buy at open strategy could have earned 58%, excluding brokerage fees and slippage, if all gains were reinvested. This can be verified using our cup and handle pattern backtest tool.

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