What is Cup and Handle Pattern: A cup and handle is a price pattern that investors use to determine trending stocks that are in a temporary holding state, meaning the stock’s movement, for now, is stagnant.
Cup and handle is a continuation pattern that is bullish. It also indicates whether a previous breakout may continue if the stock breaks out of the pattern. The pattern helps in recognizing buying opportunities.
This article is all about identifying the “cup and handle” pattern and how to use it to set up entry points and exit points.
A cup and handle (C&H) pattern is a technical indicator that was introduced in 1988 by William J. O’Neil in his book “How to Make Money in Stocks.”
The cup and handle patterns are easy to recognize because they look like a teacup with a handle. The cup is shaped like the letter “U” with the handle pattern form on the right side, with the price having a downward shift.
This article aims to explain what is Cup and Handle Pattern. Let’s explore and learn more.
What is Cup and Handle Pattern & How is it Formed?
The cup starts when an up-trending stock reaches its resistance and its price comes down to the support part. The stock price will go sideways for some time, forming the curve, and then it will start moving up again towards the resistance.
The handle is formed when the price comes down a little, forming new support (which is higher). The price breaks the resistance, starting an uptrend that continues upwards.
The handle’s size is usually one-third to two-thirds of the cup’s size.
Source – TD Ameritrade
Inverse Cup and Handle
Inverse or reverse cup and handle is an upside-down cup with the breakout on the downside. It is a bearish continuation pattern. This pattern is just the opposite of the conventional cup and handles pattern.
It is formed by a fall, then a rally, and a sharp fall in the price combined with low trading volumes. This is an indicator used to take up short positions.
How to Identify Cup and Handle Pattern?
The pattern should have a long curve. If it is in a “V” shape, then it is a double bottom or some other pattern, and it is not a cup. The depth of the cup should not be too much. The same applies to the handle too. It should not be too deep.
ALSO READ: Charting and Technical Analysis
How to Use the Cup and Handle Pattern?
Usually, the cup and handle indicator is used this way. The trader places a buy order slightly above the trend line near the handle. The order should be executed only if the price breaks the resistance.
Most traders make the mistake of getting in early due to a false breakout. Keeping an eye on volume helps to avoid that. The exit point of the stock can be determined in two ways;
1. We need to measure the handle and add it above the resistance this gives a smaller price target.
2. We measure the height of the cup and add it above the resistance this gives a bigger price target.
Cup and handle patterns are mostly used by swing traders. These patterns take time to form.
Ideally, this pattern takes up to 6 to 7 weeks or more to form.
Limitations of Cup and Handle Pattern
The cup and handle pattern is to be used with other technical indicators such as volume and RSI. It cannot be used as one single indicator to take trades. Cup and handle patterns are subject to timeframes, meaning it takes a longer time to form the pattern, leading to late entries or missed trading. Example of cup and handle –
Source – Top Stock Research.com
In Closing
The cup and handle is a bullish and bearish continuation pattern that is mostly used for swing trades, this pattern resembles the shape of a teacup which helps in recognizing buying and selling signals, this hand in and with the volume indicators.
The cup and handle pattern is a very popular trading pattern with a higher success ratio. It is better to add a trailing stop loss to avoid huge losses when the trade does not go as planned.
That’s all for the article, we hope you enjoyed reading this blog on what is cup and handle pattern. For more tips and ideas on investing, check out the Courses section on FinGrad. As always, Happy Investing!
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