Cup And Handle Chart Pattern - CANSLIM strategy.
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How To Make Money In Stocks by William O’Neil.
O’Neil, founder of the stock brokerage firm William O’Niel and Co, creator of the CAN SLIM strategy and chairman of the publication Investor’s Business Daily.
In this book O’Neil presents 100 charts of the best performing stocks through to 2008. We look to discover the common attributes from the charts which led to their spectacular performance, of which some skyrocketed 20-fold in just a couple of years.
We offer a summary of the book and provide a template you can use to gain similar spectacular performance.
Let’s take a look.
We managed to pull all the 100 stock chart statistics together highlighting the return of each, the number of weeks it took to achieve the return, and perhaps more importantly the annualised return for each chart.
In a moment we will sort the companies in order of the highest annualised returns and look at the characteristics of the very best performing stocks, but first let us summarise the data.
The average return achieved per stock was 805% and the average length of time to achieve such gains was 95 weeks. This gave a spectacular average annualised return of 543%, or almost five and a half times your investment in a year.
We can see in this chart the best return achieved by a company was almost 7000%, all the way down to 210% here. Although these numbers seem impressive at first glance, we must consider the time period in which it took for these returns to materialise. We can do this by annualising the data.
On this chart we can see 6 stocks that achieved an annualised return considerably more than 1000%, a multiple of ten times your investment is an excellent achievement. The next part of this video is to focus on these 6 stocks to determine the commonalities between each, including the catalysts, the chart structure and perhaps more importantly the risk reward profile.
In sixth place we have a company called Resorts International, it achieved a 630% return in just 24 weeks which equated to an annualised return of 1365%.
Other than the annotations written on these weekly charts we are left with determining the reasons for entry ourselves, so let’s see what we can establish here.
First, we can see a Cup and Handle formation which the book refers to in some detail and is often the foundation for William O’Neils strategy.
O’Neil says cup patterns can last between 7 and 65 weeks, this example is approximately 28 weeks in total.
The “U” shaped area of the cup is important as it creates a strong foundation of owners unwilling to sell. The handle is usually the area of consolidation where a potential entry point could be determined along with a suitable stop loss.
In this example it seems the rising wedge is the catalyst, resulting from these inflection points.
The breakout of the wedge can be seen here at the suggested buy point. Thereafter the price increased 6-fold.
But where would the stop be positioned and what would be the eventual risk reward of this trade….
My suggestion would be below this small pull back under the resistance line of the wedge.
Using this stop loss distance as a measure of risk, we can see the risk reward of this trade equated to 19 to 1 assuming you sold at the climax top, this kind of ratio, when found often enough is where you can really change your account balance.
O,Neil also suggests a maximum stop loss position of no more than 8%.