Introduction
The contemplation and learning of recurring incidents in different ways surely deserve anyone’s attention. This is an acquired quality that finds its applications in almost every field of life, including the stock market. Here we have different patterns and charts developed to forecast price behavior and its fluctuations in the market.
It is somewhat like a cup with a handle attached to it. The Cup and Handle Pattern clearly describe the upward and downward price movement in Stock market.
Just like life, the cup and handle pattern for trading sees its ups and downs. Repeated observation of this pattern acts as a signal to make better decisions one way or another. Do you want to know more? Let’s discuss it in detail.
What is the Cup Handle Pattern?
Cup-and-handle chart is one of the familiar candlestick chart patterns shaped as cups with handles. The majority of earlier day proponents uphold it as one of the strong methods of breakout trading.
This usually now provides traders with an estimate of the price surging spike, which allows them to trade at the breakout point after completing the formation, looking out for the upward rise.
Indeed, Quite often It is regarded as a great up indicator when combined with the concepts of supply and demand.
Analysis of Cup Handle Pattern
The cup and handle pattern is somewhat similar to a teacup on the chart. The handle represents a small section of the entire pattern that lies below the cup. The price slightly dips, rallies to create a “U” shape, and momentarily drops again to form a shallower “u or v”. On the basis of this pattern, therefore, the odds for the positive expectation could be anticipated. After the finish of the formation of the handle, there comes a time in which price is to break and go higher. That breakout point is when the handle is complete.
From a different perspective, it can also be said that it proves true the buyers in lifting prices by actually crashing through with sellers.
While the “cup” is made mostly by initial downward price movement, but which then returns to that same price level; the cup is formed and just as the price is again attempting to move down but not below the “cup depth” does it finally form the pullback that creates the “handle”.
What is an Inverted Cup Handle Pattern?
The inverted cup called the handle is simply the opposite of the normal cup and handle. The prior one would create a downtrend, whereas this one produces an uptrend. The ‘U’ of the cup ticket speaks of price making highs and lows in the market.
Then it forms an upside down U; price retouches a previous high before it goes horizontal. The new high is somewhat shorter than the previous one before the price goes down forms the U or V structure. This U or V structure is referred to as Handle.
Inverted Cup Handle Pattern Analysis
The inverted cup and handle pattern indicate a possibility of a trend change direction. It is during the downtrend and symbolically drawn inverted cup and handle shape that a trader can conclude that the position of the market is going downhill for some time to come.
When this appears during an uptrend, then it indicates that the trend is about to change direction. Whenever that pattern appears and it breaks out, it will be mostly in a downtrend. Traders will take advantage of this through short selling.
Difference between Cup Handle Pattern and Inverted Cup Handle Pattern
Cup and Handle Pattern
Inverted Cup and Handle Pattern
It is a cup-like shape with a handle
It has an inverted cup-like shape with a handle.
It indicates the price of the market from a downtrend to an uptrend.
It indicates the price of the market from uptrend to downtrend.
In an uptrend, the inverted cup and handle pattern can also signal that the trend will keep going after the breakout.
It’s not as usual for the inverted cup and handle pattern to lead to a continuation after the breakout point, unlike the regular cup and handle pattern.
The breakout point is at the resistance zone
The breakout point is at the support zones
What Does a Cup and Handle Pattern Indicate?
We have already seen this analysis regarding the cup and handle pattern as one of the best indicators for bullish reversal; now, let us analyze it in detail.
On close examination of the pattern, one sees the price very difficult to cross below a certain level. Prices remain steady with some time in the cup rounded bottom. This shows that the weakness is dissipating and the effort is being made by buyers to outbid sellers.
Trying to fall back into the previously mentioned downwards aggressiveness in the handle price is immediately driven back by buyers. This thus reflects a level of commitment from these buyers in stopping the buyer trend indicating that possibly in the end, they might spur the price higher.
Trading in Cup and Handle Pattern
An inherent in the nature of trading in the Cup and Handle pattern is that traders are required to possess some technical knowledge about any point of the pattern.
Entry Point
The entry is taken at the breakout points in both the Cup and Handle pattern and the inverted Cup and Handle pattern.
Stop Loss
A stop loss for a normal Cup and Handle pattern should be placed below the handle pattern, whereas in an inverted Cup and Handle pattern, it should be placed at the high of the handle.
Target
The target on the upside on both occasions would be about 110 when a cup pattern sits between 90 and 100. In contrast, in an inverted cup and handle, the target on the downside is probably close to 80 when the cup is formed between 100 and 90.
Try Bear trap and other candlestick cheat sheet patterns for more information on different chart patterns.
Target for Cup and Handle Pattern
The depth of the cup aims to measure the same target as would be measured in a cup and handle pattern. If the cup’s depth results in a reduction of 2% in the price, then the trader should anticipate a rise of 2% from the neckline breakout point.
Restrictions of Cup and Handle Pattern
These are some defined restrictions about the Cup and Handle Pattern:
This is mainly to identify extensions and reversals in the trends of the trading system or markets. Patterns become popular but at times can mislead merchants.
Should be used only by a person who has developed good knowledge of technical analysis tools since they are not reliable by themselves.
False signals are traps most of the time to traders. The clients should have that advanced and technical knowledge level of trading to filter out frauds that way.
Conclusion
This article points out that a few patterns in the trading world can be real game changers. The cup and handle pattern is the one which resembles a teacup structure found at a trading market. Each and every change in the price indicates that it is giving more value for that person who takes trading as an interest in terms of the unique blend of change involved.
Yet it has a dark side. Sometimes there are risks involved in trading, so it becomes essential to know technical analysis as well.
The validity of trading patterns is not restricted to risks and finance; they instead help in deciding the entry points and targets required for risk mitigation strategies while directing the course of traders to make their trades damage-free.
FAQs
Using a cup and handle pattern, you can figure out the bullish movement of a stock in time and end up in the stock market price. Specifically, the cup has been formed with the resembling teacup, while the handle can be formed at the one end. Such a pattern proves beneficial in finding upward trends in stock price.
Place a question for identification of Cup and Handle Pattern.
The price chart of the stock should be analyzed to detect the cup and handle formation. The first feature would be a “U” shape, followed by a smaller “u or v” shape.
What does Cup and Handle Pattern signify?
Potential bullish reversal; the buyers are becoming strong and may push prices up.
How to trade using a’cup and handle’ approach?
For entering into a long position into a trade, do it at breakout point and stop loss beneath the handle.
What is the ultimate objective for Cup and Handle Pattern?
From the bottom, in general, determines the cup depth to achieve as the same percentage increase as it equals from break-out point.
What are the disadvantages of the Cup and Handle Pattern?
Used as one of several technical analytical tools, good but not infallible; occasionally misleads traders.
Is the Cup and Handle Pattern full-proof?
No; it occasionally gives false signals, making it crucial to understand risk management and technical analysis in trading.
