Meaning of Cup and Handle Pattern

Some investors believe in fundamental analysis. This involves looking at the company's earnings history, and exploring the overall outlook of the economy and industry before investing in stock. Technical analysis, another major school of investing, is a method of forecasting the price movement for a security by studying the past patterns in asset prices. This investing philosophy believes that history repeats itself and that one can profit in stock markets by spotting patterns which often follow the same path.

Candlestick patterns are a popular tool for technical analysis. These are a series of long-term bars that are either green or light if an asset's closing price is higher than its opening price, and red or dark if it falls during trading. The most common candlestick patterns include rising three methods and falling triangle, piercing lines, hammer and double bottoms.

What are the cups and handles?

The cup-and-handle pattern is a bullish continuation pattern. It indicates a strengthening in the price for a security followed by a breakout, after which the price goes up. The U-shaped cup indicates the period of consolidation, while the handle signifies the breakout.

American technical analysts are believed to have popularised cup and handle chart patterns.

William J. O'Neil, through his book Making Money in Stocksin late 1980s. In a few paragraphs, O'Neil offered an in-depth analysis of the cup and handle and provided identification and explanation. O'Neil wrote that cup and handle charts patterns last from 7 to 65 weeks, most are three to six months. The percentage correction between the absolute peak and the lowest point of the price pattern is usually between 12%, 15%, or 33%.

Cup, handle formation

1. To be considered a continuation pattern, a cup and handle must precede a trend. Traders should ensure that the trend is at least a few months old. The cup and handle formation might be too mature and could lead to a weak consolidation phase, which can impact potential gains.

2. A cup with a rounded bottom is better than one with a flat bottom. A soft U-shape means that the security's price will correct with some weak spells at the threshold and support from the bottom.

3. Ideal handle formation should take about a week. The price momentum is downward when the price falls below the low touched just a few weeks ago.

4. Normal circumstances will not allow for a cup depth greater than 33% of the previous upsurge. In choppy markets, it may drop to 50% or even lower in extreme cases.

5. A cup and handle should have the same highs, but that is not always possible.

Handling Cup and handle chart patterns

Traders should be looking for a breakout that is accompanied by an increase in volume above the line of resistance.

- A price target can be set at the same distance as the breakout, or between the bottom and the breakout.

Traders can enter the cup or handle formation at two points. The breakout duration is the first. This is a good time to enter the market.

- The second is when the security's price reaches the line of resistance after the breakout. If the asset breaks through the line of resistance for the cup-handle pattern, traders might consider taking a long trade.

- The stop target can be set at any handle's low. If the trader is able to afford greater risk, the stop target could be multiplied by two.

Conclusion

Although cup and handle charts patterns are easy to spot for experienced traders they can be difficult to see for beginners trading in stock markets. It is also useful in forex trading . The cup-and-handle formation has a clear advantage over other candlestick charts in that it has clearly defined entry and stop levels. These patterns are not immediately visible in the market, and must be thoroughly verified by technical indicators.