How to identify and trade CUP and HANDLE Chart Pattern?
The Cup and Handle pattern is widely considered as a reliable indicator of a bullish reversal in an asset's price. It's important to note that the pattern's reliability is enhanced when it occurs after a prolonged downward trend. The "cup" formation is created as the price of the asset fluctuates within a confined range, forming the shape of a "U". This represents a period of accumulation, where traders and investors are buying the asset, but at a slower pace than the selling pressure, causing the price to fluctuate within a narrow range.
The "handle" of the pattern forms as the price of the asset experiences a small downward correction, but still within the trading range of the "cup". This handle acts as a final period of consolidation, allowing traders and investors to take profit and take a step back before the trend resumes.
The final stage of the pattern is a break above the resistance level created by the rim of the cup, signaling the start of a new upward trend. Traders typically look for a volume increase to confirm the break and to ensure that the trend has strong momentum. The size of the cup and handle pattern can vary, but a minimum height of 15-20% is usually considered a valid formation.
Trading the Cup and Handle pattern involves identifying the pattern formation and then taking a long position when the price breaks above the resistance level formed by the rim of the cup.
Identify the pattern, measure the height of the pattern from the bottom of the cup to the rim and project that height from the point of the breakout to determine a potential price target.
Once the breakout has been confirmed, enter a long position in the asset. Place a stop-loss order below the handle to limit potential losses in case the pattern fails.
Monitor the price of the asset to ensure that it continues to rise and reach the projected price target. Adjust the stop-loss order as needed to lock in profits and manage risk.
It's important to note that the Cup and Handle pattern is just one of many technical analysis tools and should be used in conjunction with other forms of analysis, such as fundamental analysis and market sentiment, to make informed trading decisions. Additionally, it's crucial to have a solid risk management strategy in place and to only trade with money that you can afford to lose.