If you’re not ready to take on the live markets, you can open a risk-free demo account to identify the cup and handle pattern and practice your trades. In last one year this is the third time that Adani ports has formed cup and handle pattern. A version of this column was first published in the July 9, 2010, edition of IBD.
A reversal pattern can be seen when the price is in a long-term downtrend, then forms a cup and handle that reverses the trend as the price begins to rise. A continuation pattern on the other hand occurs when there’s an uptrend; the price rises and forms a cup and handle, and then continues to rise. Let’s consider the market mechanics cup and handle chart of a typical cup and handle scenario. A new rallyprints a high, and the price rolls over into a correction, flipping relative strength oscillators into sell cycles that encourage strong-handed longs to exit positions. New buyers enter the pullback at the 38.6% or 50% retracement level, expecting the prior uptrend to resume.
Limitations Of The Cup And Handle
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To identify the cup and handle pattern, start by following the price movements on a chart. The pattern starts to form when there is a sharp downward price movement over a short time. This is followed by a period where the price remains relatively stable. Then, there is a rally that is more or less equal to the initial decline. These movements form a ‘u’ shape on the chart – this is known as the cup. The cup and handle pattern occurs in both small time frames, like a one-minute chart, and in large time frames, like daily, weekly, and monthly charts.
Cup And Handle Chart
When the stock hits this point, it begins to drift lower because the stock’s new believers are now outnumbered by those who are looking to sell and lock-in their profits. The cup and handle pattern is a bullish continuation pattern triggered by consolidation after a strong upward trend. The pattern takes some time to develop, but is relatively straightforward to recognize and trade on once it forms. As with all chart patterns, trading volume and additional indicators should be used to confirm a breakout and continuation of the original bullish price movement. A cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities. When a stock forming this pattern reaches old highs, it experiences selling pressure from investors who bought at those levels previously.
A trailing stop-loss may also be used to get out of a position that moves close to the target but then starts to drop again. Whatever the height of the cup is, add that height to the breakout point of the handle. For example, if the cup forms between Xero (software) $100 and $99, and the breakout point is $100, the target is $101. The price target following the breakout can be estimated by measuring the distance from the right top of the cup to the bottom of the cup and adding that number to the buy point.
Recognizing Cup And Handle Patterns
This guide will show you how to find fresh trading opportunities every single day. Check out this guide to learn how to scan for active low float stocks cup and handle chart daily. Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors.
A referral to a stock or commodity is not an indication to buy or sell that stock or commodity. However, you will face the risk of missing the trade if the price fails to pullback and continues to advance uninterrupted. Here is one reason why I don’t like cup with handle patterns. Also, when the stock is breaking out, you should generally see a rush in turnover. Volume should ideally rise at least 40% above its 50-day average.
Learn The Pattern
IBD Videos Get market updates, educational videos, webinars, and stock analysis. An upward-sloping handle is flawed; it represents weak demand as new buyers move into the stock at a trickling pace. During the stock’s actual breakout, you want to see a new wave of buyers coming in at a torrid pace, not a trickling one.
Author: Coryanne Hicks