Reblog: Why the Cup & Handle Chart Pattern Works


While my trading is more following capital flows based on trends that I measure with key moving averages there is one chart pattern that I find very useful and that has high probabilities of success.

The cup and handle pattern is a bullish continuation formation, it is one of the newer chart formations and can be easily identified on a price chart. This chart pattern was first popularized by William J. O’Neil in the first edition of his 1988 book, How to Make Money in Stocks. In order for the cup and handle setup to have the highest odds of succeeding, it should come after a clear uptrend is in place. The chart pattern consists of two key components: (1) cup and (2) handle.

The cup part of the formation is created when profit taking sets in or the market itself is in a correction and the stock sells off and forms the left side of the cup. The cup bottom is formed when the stock finally runs out of sellers at new low prices and buyers start moving in and bidding the stock back up again as sellers demand higher prices to turn the stock over. Most of the time as the stock emerges out of the right side of the cup in an uptrend it fails and meets resistance the first time it tries to break out to new high prices and the pattern forms a handle. The second run at new highs usually works as the sellers have been worked through and the stock breaks out to new highs.

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Reblog: 9 books about financial markets you really should read


Earlier this week I wrote (again) about the importance of understanding financial market history. This prompted a few people to ask for some of my favourite books on the topic. Here goes:

Devil Take the Hindmost: A History of Financial Speculation

If I had to pick just one book to read on the topic, this would be the one. Edward Chancellor weaves history, psychology, and economics beautifully in what is also one of the better-named finance books I’ve come across.

The Panic of 1907: Lessons Learned From the Market’s Perfect Storm

The story behind the banking crisis most people probably aren’t familiar with. This book shows how primitive the financial markets were before banking regulations and the Fed came around.

The Great Depression: A Diary

This first-person account of what life was like during the Great Depression is not only a lesson in financial market history but also how difficult that period in history was for those living through it. I can’t recommend this one enough.

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Reblog: How Bull Markets Affect Your Intelligence


“Become more humble as the market goes your way.” – Bernard Baruch

Lately, it feels like every time I time I log into check my investment accounts the market values are higher than the previous time I looked. The stock market continues to hit all-time high after all-time high. I have to admit, it feels pretty good when things are going your way in the markets and it seems like everything you touch turns to gold.

This is easy. Everything I buy just keeps going up.

It would be nice to assume that my intelligence has risen along with my skills as an investor, but I have to admit that’s not really what’s going on here. We just happen to be in the midst of a strong bull market. So I have to remind myself. Seeing your investments rise is no way to validate your level of intelligence. In fact, it can be extremely dangerous to your wealth when the music stops playing.

Who needs an insurance policy when all of my risky investments have been rising for years?

Researchers have found that the brain activity of a person who is making money on their investments is indistinguishable from a person who is high on cocaine or morphine. The brain of a cocaine addict who is expecting a fix and people who are expecting to make a profitable financial gamble are virtually the same. The danger in allowing a bull market to increase your confidence as an investor is that it can lead you to take unnecessary or avoidable mistakes to continue to get that high.

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Reblog: Find a Monster Stock in 15 steps


Monster stocks are those wonderful beasts that make you look like a genius trader.

Shorts think that they are way too expensive and will crash, so they go short and have to cover en-mass after another 10 point run; they create even more buying pressure. Traders that short monster stocks do not understand the momentum that earnings expectations and growth cause for a stock’s price. They do not understand supply and demand. A stock that is $300, $400, or $500 based on earnings per share, could still be fundamentally cheaper than a $10 junk stock that has billions of shares floating around with tiny earnings per share.

Sounds great, but where do we find these beasts?

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