For each of the telltale chart patterns coverer here, a key requirement is that the stock be at or near a new price high as it breaks out.

A new price high is a sign of strength and an important reminder of this historical stock market fact regarding how to buy stocks:

• Stocks hitting new price highs tend to go higher.
• Stocks hitting new price lows tend to go lower.

Avoid stocks trending down and hitting new lows. To improve your stock investing, focus on stocks showing strength as they climb into new-high ground and break out of a sound chart pattern.

The New Highs list features stocks at or near new price highs.

When getting started with stock investing and how to read stock charts, focus on the three primary patterns. While there are other types of bases, these are the most common and they consistently produce impressive gains in every market cycle.

By using stock charts to spot these bases, you'll be able to get in early on the best stocks to buy and watch.

So start by getting to know these three common chart patterns and the buy points they provide.

• Cups: Cup with Handle and Cup without Handle
• Double Bottom
• Flat Base

Cups: Cup With Handle

What To Look For In A Cup With Handle

Prior uptrend of at least 30%

To form a proper chart pattern, you have to have a prior uptrend. The idea behind bases is that after making a decent run, the stock takes a breather, then forms stepping stones to set up an even higher climb.

Base depth: 15%-30%

The depth of the base — measured from the peak on the left side of the cup to the lowest point of the cup — should be between 15% and 30%. In a severe bear market, the depth may be 40% — 50%. As a general rule, look for stocks that held up relatively well during the market correction. For example, let's say one stock on your watchlist dropped 35% while another's base depth is only 20%. All else being equal, the stock with the 20% decline could be forming a stronger base.

Base length: At least 7 weeks

The first down week in the base counts as week 1.

The minimum length for a cup with handle is seven weeks, but some can last much longer — several months or even a year or more. Be wary of any chart pattern that has the shape of a cup with handle but is only, say, five weeks long. That's typically not enough time for the stock to consolidate the prior gains. Such bases have a higher chance of failing.

Handle

The handle should be a mild pullback on relatively light volume. The depth of the handle should be 10%-12%. Additionally, the handle should form in upper half of the base. The peak of the handle should be within 15% of old high on the left side of the cup.

A handle is a shakeout of weaker holders — those not committed to holding the stock longer term. A sharp decline of more than 12%-15% in heavy volume could indicate a more serious sell-off, one that might prevent the stock from launching a successful move.

If the handle begins forming too soon (i.e., in the lower half of the base), it could mean institutional buying is not yet as strong as it needs to be to push the stock higher.

Who Are Weaker Stock Holders?

Who are the weaker holders getting shaken out in the handle? Typically, they're investors who bought late, right at the end of the prior uptrend. When the stock sold off to form the left side of the chart pattern, they suffered a sharp loss. Getting a profit is no longer their goal. They just hope to recoup some of their losses. So as the stock nears that old high — and the weaker holders' break-even points — they start to sell.

Here's why that shakeout is healthy.

Having a lot of weak holders in a stock means that whenever the share price rises, these weak holders will sell shares, pushing the price back down. (This happens when a stock has excessive overhead supply.) Once most of the weaker holders are out of the picture, it's easier for the stock to move higher with less selling pressure or resistance.

What about the big investors who have been picking up shares as the stock formed the right side of the cup?

These investors are more committed and are holding onto their shares. That's why the volume in the handle is light.  Only the weaker holders are selling. The large institutional investors are sitting tight in expectation of a new upward climb.

Ideal Buy Point: Clearing point of resistance in the handle

The ideal buy zone is up to 5% above the ideal buy point.

The buy point in a cup with handle and other chart patterns is determined by a line of prior resistance, in this case the peak in the handle. If the stock can clear that peak (i.e., the prior ceiling of resistance) in heavy volume, chances are good it is ready to ride that breakout into a new run.

If the ideal buy point is, say, 30, then the buy zone would range from 30 to 31.50 — 5% above the optimal initial entry.

More About Ideal Buy Points

For best results, buy stocks as close to the ideal buy point as possible.

Avoid buying stocks that are extended more than 5% above the initial buy point. Once a stock climbs more than 5% above the ideal buy point, it's considered extended beyond the proper buying range.

Stocks often pull back a bit after a breakout. So if you buy extended, there's a higher chance you'll get shaken out of the stock because it triggers the 7%-8% sell rule. (Learn more here about when to sell stocks.)

Volume on day of breakout: At least 40%-50% above average

On the day a stock breaks upward past its ideal buy point, volume should be at least 40%-50% higher than normal for that stock. That shows strong institutional buying. On many breakouts, you'll see volume spike 100%, 200% or more above average. Light or below-average volume could mean the price move is just a head fake, and the stock is not quite ready for a big run.

Also note that sometimes you will see a stock climb right up to the ideal buy point then run into renewed resistance. That's why you want to confirm demand by seeing a stock punch through that buy point in heavy trade.

Chart Patterns: Cup Without Handle

The cup with handle — also called a cup-shaped base or simply a cup — is a variation on the cup-with-handle chart pattern. As the name implies, it's essentially the same, except it doesn't have a handle. All the attributes (including heavy volume on the breakout), except for the buy point, are identical.

The buy point in a cup-shaped base is determined by the peak on the left side of the cup — the most recent area of resistance.

How To Buy Stocks On Breakouts From Cups

Below are examples of winning stocks that launched big runs from the cup-with-handle and cup-without-handle chart patterns.

Both the daily and weekly charts are included. As covered earlier, weekly stock charts show the longer-term trend, while the daily charts show the action on the actual day of the breakout. Be sure to use both!

Chart Patterns: Double Bottom

While the shape is different from a cup with handle, the core concept behind a double bottom is essentially the same.

• Mirroring The Market: Double bottoms tend to form while the overall market is volatile, and that's reflected in the shape. You have one down leg, then the stock tries to rally but hits resistance and ends up pulling back to form a second down leg. The stock rebounds one more time and is finally able to punch through and move higher. The breakout typically occurs when the market indexes have also bounced back from a correction into a new uptrend.
• Support And Resistance: Like the cup with handle and all other bases, the buy point for a double bottom is determined by the most recent area of resistance. That's the peak in the middle of the W. Breaking through that resistance on unusually heavy volume shows institutional investors are back in the game, aggressively scooping up shares.
• Shakeout: Remember how the handle in the cup with handle shook out the weaker holders? You have the same concept here, just in a different place. Note how the bottom of the second leg in a double bottom undercuts the bottom of the first leg. That gets rid of the weaker holders, leaving more committed investors who create support for the stock's new run.

What to Look For

• Prior uptrend: 30% or more
• Base depth: 40% or less
• Base length: At least 7 weeks (first down week in base counts as week 1)
• Peak in middle of W: Should form in upper half of base and be below left-side peak
• Undercut: Bottom of second leg down should be lower than bottom of first leg down
• Buy point: The peak in the middle of the W (buy range is up to 5% above the ideal buy point)
• Volume on day of breakout: At least 40%—50% above average

How To Buy Stocks On Breakouts From Double Bottoms

Below are examples of winning stocks that launched big price runs from a double-bottom chart patterns.

Chart Patterns: Flat Base

Earlier we saw how the best stocks usually form "stepping stones" as they make their big moves. They'll go up for a while, pull back to form a new chart pattern, then resume their climb — giving you multiple opportunities to make money. Flat bases are classic examples of that. They typically form after a stock has made a nice gain from a cup with handle or double bottom. That's why they're often considered second-stage bases.

Here are the key concepts regarding flat bases.

• Trading Sideways to "Digest" Earlier Gains: Stocks will often break out of a cup with handle or double bottom, run up at least 20%, then trade essentially sideways to form a flat base. It's a milder decline than what you see in other patterns — no more than 15%. The price range will usually remain fairly tight throughout the base. That indicates institutional investors establishing or adding to their positions, trying to buy shares within a certain price range. This allows them to increase their holdings without significantly driving up their average cost per share.
• Support and Resistance: Here again the buy point is determined by the most recent area of resistance — the highest price point within the flat base. Until the stock breaks through that "ceiling" (preferably in above average volume), it won't be able to launch the next leg of its climb.
• Shakeout: Like other patterns, flat bases also have a way of shedding weaker holders. Instead of a sharper sell-off like the handle in a cup with handle or the second-leg undercut in a double bottom, the flat base shakeout is more of a slow grind. The weaker, less committed investors just get worn out by the indecisive, sideways action and eventually lose patience and sell.

What to Look For

• Prior uptrend: 30% or more
• Base depth: 15% or less
• Base Length: At least 5 weeks (first down week in base counts as week 1)
• Buy point: The peak within the base (buy range is up to 5% above the ideal buy point)
• Volume on day of breakout: At least 40%-50% above average

How To Buy Stocks On Breakouts From Flat Bases

Below are examples of winning stocks that launched big price runs from a flat base.

Cups, double bottoms and flat bases are the main chart patterns that launch big runs. But the best stocks will also typically offer additional buying opportunities as they make their climbs. You can use those entries to add to your existing position or, in some cases, initiate a new one.

Less Is More

Since these are considered secondary buy points, it's a good idea to buy fewer shares than you would from an initial position in a cup with handle, double bottom or flat base.

That's especially true if you're buying more shares in a stock you already own. In that case, you always want to buy fewer shares than you purchased in the initial breakout. That keeps you from running up your average purchase price too much.

Below are two of the most common alternate and add-on buying opportunities:

• Three-Weeks-Tight
• Pullback to 10-Week or 50-Day Moving Average

Buying Stocks Using Stock Charts: Three-Weeks-Tight

Like a flat base, this occurs after a stock breaks out, goes up for a while, then pauses to digest those gains. As the name implies, it only takes three weeks to form. (Stocks may also form four-weeks-tight consolidations.)

What to Look For

• Each weekly close should be within about 1% of the prior week's close. That's what creates the "tight" range you see in the stock chart. Remember to focus on the weekly closing prices. During the week, the share price may move around a bit, but you're focused on where it closes the week. What do the tight closes tell you? That institutional investors are holding onto their shares. Fund managers and other professionals expect more from the stock, so they're not taking their profits off the table. In fact, they're likely quietly accumulating more shares from weaker holders that get tired of waiting and sell. That's what keeps the stock in that tight and narrow price range.
• Buy point: The peak in the formation, which is the most recent area of resistance. The buy range is up to 5% above the ideal buy point.
• Volume on day of breakout: At least 40% above average.

Below is an example of a stock that launched a big price run from a three-weeks tight.

Buying Stocks Off 10-Week or 50-Day Moving Average

After a stock has broken out of a proper chart pattern, it may pull back to the benchmark 10-week or 50-day moving average lines.

If the stock bounces off the moving average and shoots higher on heavy volume, it can offer a chance to buy shares. It shows institutional investors are stepping in to "support" the stock and protect their position. It happens around these moving averages simply because professional investors use those lines as key benchmarks.

What to Look For

• Look for light volume on the pullback. This shows professional investors are not aggressively selling shares. Volume may be above average certain days or weeks during the pullback, but overall it should be "drying up" or getting lighter as the stock moves lower toward the moving average line.
• Make sure the stock bounces off the moving average line and heads higher on heavy volume. You want the stock to rebound and show strength, not weakness, before you buy. This is not about "buying on the dips." Never buy a stock as it's moving down. Wait for it to bounce higher before investing.
• Buy as close to the moving average line as possible. As the stock bounces off the 50-day or 10-week moving average line, you want to buy as close to that line as possible. The farther away from the line you buy, the riskier it gets.
• Focus on the first two pullbacks. The best gains typically come from the first two pullbacks to the 10-week or 50-day moving average. By the time a stock's third or fourth retreat occurs, it likely has already had a good move. Chances are now higher that the pullback is actually the start of a more serious sell-off.

Below are examples of winning stocks that launched good gains from a pullback to the 10-week or 50-day moving averages.