In trading, every little decision you take determines the frequency and the size of the profits you make. Both fundamental and technical analysis is important for traders to get a better understanding of the chosen asset and its value. The same indicators, the same charts could all be interpreted and used in multiple ways by different traders. When you look at the charts of different assets you are likely to find many patterns. One such pattern that is popularly used by traders is the cup and handle pattern.
The strategy gets its name from the shape that forms on the graph. There is a U pattern similar to a cup followed by a peak and then a trailing line when the trend is downward. There are several reasons why a particular stock might result in a cup and handle pattern on its graph. It happens particularly when the stock takes a while to reach a previous high and then struggles to sustain it. As the stock reaches a high, similar to a previous limit, after a long wait there are many traders who would jump to sell it at that level. At this point, the due to the increased selling behavior the downward trend of the price begins. If you are looking to make ‘buy’ or ‘sell’ decisions when such a pattern occurs you should begin with understanding the characteristics of the cup and the handle. The longer the duration for which the U curve is traced, the stronger would the signal be. This means that the price should graze a gradual curve rather than form a steep or deep U which in some cases might even result in a ‘V’ like a curve.
How can you profit from the cup and handle pattern?
There are many ways to place trades on a stock that forms a cup and handle pattern. The position of the handle, the instant at which the handle begins to form are all very important. But one other thing that matters, even more, is the pattern that occurs before the cup forms. One that has a strong and stable trend prevailing the cup would be easier to deal with. Here you would find a stop buy order to be beneficial. The ideal limit for this one would be the peak at which the handle forms. So if a trend reversal occurs after the handle and if the price manages to surpass the resistance level then the order would be placed. Your profit, in this case, would be roughly the value difference between the base of the cup and the level at which the handle begins. You could choose to place a sell order on the basis of the supply line drawn or even place a buy order on the basis of the handle level. Cup and handle patterns do take a span of a few weeks. If you find some quick patterns they might not really be very reliable in placing critical orders.