What is Inverse Cup and handle pattern?
Inverse Cup and handle pattern is a stock market pattern, which helps to identify the continuation of the bearish trend. Traders use this pattern to do technical analysis of price action in stock market.
The pattern is called the Inverse cup and handle because it resembles the cup with an inverse “U” shape and the handle has a slight upward angle.
It is a bearish pattern forms in a downward 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 bearish trend. When the price action bounce back from the support level, the buyers seem to dominate the market for a time period. Then price momentum returns to the support level forming a cup.
Again, the price bounce back from the support level, but this time the price reaches half of the cup (resulting in forming a handle), this indicates that the sellers are now dominating the market, which will result in strong bear run after the breakout.
How to identify the Inverse Cup and Handle Pattern?
Identifying a strong Inverse 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 a longer time frame. Here are few points to remember while identifying a strong pattern.
- Inverse cup and handle pattern forms during a downward trend
- Generally, the length of the cup with a inverse “U” shape provides a strong bearish 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 support level, the depts of the handle should not be more than half of the cup, which is the indication of strong bear run.
- Price action should not break 75% of the cup depth, it will not be a Inverse cup and handle pattern.
- Breakout: for breakout you have to assign the Trend line to the handle and wait for breakout at the support level.
How to do trading with Inverse 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 support level, the second candle which will form after the breakout candle, should close below the previous candle.
- The closing of the second candle will be your entry point. You can enter into a selling 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 Inverse cup and handle pattern.
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.
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.
Let’s assume, the entry is at price 500 and the stoploss is added near 520. Eventually, when the price reaches 470, you can decrease your stoploss till 510. This way if the price reaches around 400 there will be 50 points gap between the price and stoploss. This strategy will help you earn profit without the risk of losing all your profits earned during that trade.
Where to put Target?
Stock price x 2% or 3% will be the target point for a trade in Inverse 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.