What is Cup and handle pattern?
Cup and handle pattern is a stock market pattern, which helps to identify the continuation of the bullish trend. Traders use this pattern to do technical analysis of price action in stock market.
The pattern is called the cup and handle because it resembles the cup with a “U” shape and the handle has a slight downward angle, which is the handle.
It is a Bullish pattern forms in an upward trend, the formation of the pattern can take up to 2 months or even a year.
Understanding the pattern.
The pattern indicates the continuation of the bullish trend. When the price action bounce back from the resistance level, the sellers seem to dominate the market for a time period. Then price momentum returns to the resistance level forming a cup.
Again, the price bounce back from the resistance level, but this time the price reaches half of the cup (resulting in forming a handle), this indicates that the buyers are now dominating the market, which will result in strong bull run after the breakout.
How to identify the Cup and Handle Pattern?
Identifying a strong cup and handle pattern is a difficult task, one may have to understand the dynamics of the pattern. It needs a lot of patience because it forms in longer time frame. Here are few points to remember while identifying a strong pattern.
- Cup and handle pattern forms during an upward trend
- Generally, the length of the cup with a U shape provides a strong bullish signal. avoid the cups with “V” shape bottom. Depth of the cups should not be overly deep.
- The handle forms after the cup, when the price action bounce back from the resistance level, the depts of the handle should not be more than half of the cup, which is the indication of strong bull run.
- Price action should not break 75% of the cup depth, it will not be a cup and handle pattern.
- Breakout: for breakout you have to assign the Trend line to the handle and wait for breakout at the resistance level.
How to do trading with Cup and Handle pattern?
When to take entry?
To make good profits in stock market, it depends on when you are entering into a position. It takes constant watch over the market and patience to wait for the right moment.
- Place the resistance level and support level on the handle.
- When the price action breaks the resistance level, the second candle which will form after the breakout candle, should close above the previous candle.
- The closing of the second candle will be your entry point. You can enter into a buy position.
Where to add stoploss?
Stoploss are orders with instructions to close a position when it reaches a certain price known as stop price. Stoploss provides a security in a long position as well as short position.
Placing a stoploss requires a lot of experience. Generally, it does provide security to the investment but placing a stoploss within a minimum range will result in hitting the stoploss quite often. Many trades happen to hit stoploss before hitting the target.
Here are the two stoploss strategy you can use for Cup and handle pattern.
Fixed Stoploss
Stoploss which is placed without any modification throughout the trade is called fixed stoploss. You can place the fixed stoploss near the opening of the breakout candle.
Trailing stoploss
Stoploss which is placed and modified later during the trade to maximize profit is called trailing stoploss.
You can place trailing stoploss near the closing of the breakout candle and modify it later accordingly.
For example, you enter into a buy position at 110 points and added your stoploss at 100 points. Let’s assume, you put the target at 140 but the price reaches 150, So increase your stoploss by 10 points. This way when the price reaches 200, your stoploss will be at 160. So, this will help you to maximize your profit and prevent you to lose your money as it were in stoploss 100.
Where to put Target?
Stock price x 2% or 3% will be the target point for a trade in cup and handle pattern. Let’s say, the stock price is $2000, then, 2000 x 2/100 = 40 points or 2000 x 3/100 = 60 points.
Trailing stoploss can be used to maximize the profit.