Trading financial markets can be challenging, but certain chart patterns can give savvy traders an edge. One such pattern is the “cup and handle” – a bullish signal that indicates a security may be ready to make a major move higher.
What Are Cup and Handle Patterns?
Cup and handle patterns get their name from their distinct shape on a price chart. First, there is a “cup” that forms over weeks or months as the price moves lower then trades sideways. This cup is followed by a downtrend that looks like a “handle” before the price breaks out above the highs of the cup formation
When correctly identified, cup and handle patterns can signal an asset is ready to resume its upward trend. The “cup” represents consolidation after a downtrend. The “handle” forms as selling pressure decreases ahead of a breakout.
Savvy traders look to enter long positions as the price breaks above the handle with a target price projected based on the depth of the cup formation.
Why Cup and Handle Patterns Work
Several market dynamics come together to form cup and handle patterns:
- Period of distribution – The cup represents a period of distribution where informed investors accumulate shares from less informed traders. This transfers ownership ahead of a breakout <a href=”https://doi.org/10.1016/j.frl.2021.102263″ target=”_blank”>[2]</a>.
- Decrease in selling pressure – The handle forms as selling pressure decreases and the asset trades in a tight range. This signals a potential imbalance between supply and demand.
- Increase in buying pressure – As the price breaks above the handle, buying pressure overcomes selling pressure, triggering the start of an uptrend.
Identifying these signs of accumulation and changes in supply and demand through chart patterns can give traders an early entry point to profit from a surge in prices.
How to Trade Cup and Handle Patterns
Here is a step-by-step guide to trading cup and handle patterns on BetPro Exchange:
Step 1: Spot the Cup Formation
Scan charts to spot consolidation after a selloff that forms the characteristic “U” shape of a cup over weeks or months. The cup should be a symmetrical rounded bottom rather than a jagged “V” shape.
Ideally, the cup will form after a 30% to 50% selloff after a peak. The depth of the cup can signal how much the price may increase after the breakout point.
Step 2: Identify the Handle
After forming the cup, an asset will typically enter a downtrend forming the “handle” portion of the pattern over a few days or weeks. Look for volume to dry up as selling pressure decreases.<img src=”cup-and-handle-full.png”>
A smaller, less pronounced handle indicates bullish conviction if buying pressure overcomes selling pressure with relative ease.
Step 3: Place Long Trades
Place buy limit orders just above the highs of the handle formation to trigger when the price breaks out. Set a stop loss below the lows of the handle.<img src=”cup-and-handle-trade.png”>
Project your profit target based on the depth of the cup formation. A 50% retracement would align with a potential target at the former peak.
Step 4: Manage Trades
Monitor the breakout closely in the sessions following the entry trigger. Close half the position to lock in partial profits if there is strong momentum above the trigger price.
Let remaining contracts ride towards the projected profit target. Move your stop loss to breakeven or just below the new support level to protect any open profits.
Close remaining positions if the profit target is reached or if the price closes below the new support. A failed breakout can quickly flip to the downside.
Tips for Trading Cup and Handle Patterns
Keep these tips in mind to apply cup and handle patterns effectively:
- Confirm breakouts with an <a href=”https://www.investopedia.com/terms/i/increaseinvolume.asp” target=”_blank”>increase in volume</a>. Higher than average volume adds confidence the breakout will hold.
- Use other indicators like the RSI to gauge momentum and support exit decisions.
- Focus on liquid assets where entering and exiting positions will be easier.
- Apply risk management with stop losses and profit targets based on the cup depth.
- Consider both fundamental and technical factors driving the underlying security.
With the right approach, cup and handle patterns can offer lucrative trading opportunities on BetPro Exchange.
Common Questions About Cup and Handle Patterns
What is the ideal cup size for reliability?
The cup portion of the pattern typically forms after a 30% to 50% price retracement over weeks or months. This size range balances giving the pattern time to develop relative to the volatility of the security.
How long should the handle take to form?
The handle should form over 1 to 4 weeks. A longer handle period risks too much consolidation without an eventual breakout. A shorter handle may indicate a lack of conviction if resistance is quickly overwhelmed.
What is minimum trading volume to confirm a breakout?
Look for breakout volume to exceed the average volume over the cup formation period by 50% or more. Higher relative volume adds confidence in the breakout.
Does cup depth always align with upside targets?
While not exact, cup depth serves as a good guide for setting a profit target. A 50% retracement would set a target around prior highs before the selloff that created the cup.
How can I apply stops without getting stopped out pre-breakout?
Use an initial stop below the lows of the handle formation. After a confirmed breakout, raise the stop to lock in profits. A breakeven stop or level just below newfound support works well.
Conclusion
Cup and handle patterns provide savvy traders with a way to identify opportunities to capitalize on coming breakouts. By analyzing volume and changes in supply and demand through formations on a price chart, traders can gain high-probability setups for entries and profit targets. Use the guidelines provided to effectively trade cup and handle patterns on BetPro Exchange.