How to trade using Cup and Handle Pattern?

Today we are going to learn about Cup and handle Pattern

So for we have seen Triangle pattern and Flag pattern and I hope you have liked it and understood better. This week let us learn about another bullish pattern – Cup and handle.

A cup and handle is a continuation pattern of bullish trend. It is one of the easiest pattern to identify through naked eye and it looks like Tea cup as the pattern name suggests.

Different parts of Cup and handle pattern

There are two major parts which forms this pattern.

1. CUP – It is a part where price makes a U shaped pattern and marks a consolidation period. The shape may look like bowl or rounding bottom. Avoid V shaped Cups
2. Handle – This part is formed when price making another small U shaped pattern which is 1/3rd height of CUP. Handle should be formed in shorter period of time than the time it has taken to form the CUP.

Things to Remember,

1. CUP formation should be as straight as possible and it should not be sloping up or downside too much. A perfect cup should have equal highs on both side of the cup but this is not possible all the time. So slightly sloped cup also ok but not too much tilted!!
2. The handle part should not go below the 1/3rd height and the width of the handle should be smaller than the width of the cup. Just like a Tea cup cannot have bigger handle than the size of the cup, right!!! Example: If a cup takes 8 hours of time to get formed then the handle should not take more than 1 to 2 hours.

Connecting Cup and handle through Trend line

Once you identify the cup and handle formation, just draw a straight line in top which connects cup and handle. We will get a technical breakout when the price of the handle part gives breakout above the line drawn.

Volume Factor on Handle part

As I always say, the volume is most important thing you need to check for technical breakout in any pattern. So a perfect cup and handle pattern will have the increased volumes in handle part than the volumes in Cup part. This confirms that the stock has attracted many buyers and you will get a double confirmation when the price gives breakout with big volume.

Entry, Target and SL

You can enter into the trade once the price giving breakout above the trend line drawn. The target for this pattern is arrived by measuring the height of the Cup from bottom. So if the height of the cup is say 1000 points then the technical target is 1000 points from the breakout line. Once the price is given a breakout above trend line, the trend line point becomes your immediate support and you can keep low price of the handle as your final support.