The cup and handle pattern is a technical analysis indicator that occurs when the price chart of an asset resembles the letter U with a horizontal line that generally slopes down, similar to a teacup. It is a bullish continuation pattern, which means it typically indicates a price increase once the pattern is complete. Successful trading using the cup and handle pattern requires correctly identifying the pattern, buying the asset at a logical entry point, placing a stop loss to manage risk, and setting a target price to exit the winning trade.
What is the cup and handle pattern?
The cup and handle pattern is a technical analysis pattern that occurs when the price of the asset declines, followed by a period of consolidation. The prices then rise to a level that is almost equal to the previous decline, creating a U shape or “cup” in “cup and handle.” The price then moves sideways or declines within a small price range, forming the “handle.”
Entering a cup and handle trade
After identifying the cup and handle pattern, you should wait until the handle is fully formed before jumping into the trade. The handle often takes the form of a sideways or downward channel or a triangular pattern. When the price of the asset surpasses the upper side of the cup on the right side, the pattern is considered complete and a price rise is expected.
Protecting your trade with a stop loss
A stop loss order is executed to exit a trade if the price of the asset declines instead of rising after buying the cup and handle. The stop loss controls risk in the trade by selling the position if the price drops enough to invalidate the pattern.
Selecting a target price or exit strategy
Add the height of the cup to the breakout point of the handle. This is the target price. For example, if the cup forms between $100 and $99 and the breakout point is $100, the target is $101.
Other important considerations
When the trend is upward and the cup and handle forms in the middle of this trend, the buy signal carries additional benefits from the overall trend. In this case, look for a strong trend leading toward the cup and handle. For further confirmation, look for the bottom of the cup aligning with a long-term support level, such as an upward trend line or moving average.
Frequently Asked Questions (FAQs)
What happens after the cup and handle pattern? If the cup and handle pattern is confirmed, it is usually followed by an upward price movement. You can determine a target price based on the height of the cup, but it is less clear what will happen after the initial breakout from the cup and handle pattern. To get a better idea of what will occur after the cup and handle, zoom out on the chart and look at a longer time frame. Is there a long-term bullish or bearish trend? Have the disruptions increased or decreased? These larger contextual clues can help if you plan to hold positions after the initial breakout.
How can you scan for the cup and handle pattern? There is no setup in stock scanners that you can use to find the cup and handle pattern, but the pattern can be easily identified visually. If you set your stock scanner to meet your other trading needs, you can browse the results until you find a chart resembling the cup and handle. For example, a day trader might scan for stocks with a high average true range (ATR), while a swing trader might look for stocks that have performed well in recent weeks.
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Source: https://www.thebalancemoney.com/trading-the-cup-and-handle-chart-pattern-4153469
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