Chart patterns appear when a certain asset’s price moves ups and downs in a way it forms a common shape. The shape can be a triangle, rectangle, head, and shoulder, or cup and handle. These patterns give a logical entry point, where to make a profitable exit or where to put a stop loss. If you encounter a cup and handle chart, here are the ways to use it.
The Cup and Handle Chart Pattern
This chart pattern can happen in both a small time frame (one minute chart) and a large time frame (daily, weekly, or monthly chart).
This pattern happens when the price goes down, then followed by the stabilizing period, then rally back in equal size as the decline. The price later drifts downward or moves sideways forming the handle. That price move forms a cup and handle.
This pattern can signal a continuation or reversal pattern. Reversal patterns happen when the price is in a long-term downtrend, then it forms a cup and handles reversing the trend and the price rises.
Meanwhile, a continuation happens during an uptrend period. The price is rising, then forms a cup and handle and continues rising.
Enter the Cup and Handle Pattern
You need to wait until the price move forms the handle. Make a purchase only when the price breaks above the top of the triangle of the handle.
Once the price moves out of the handle, then the pattern completes, the price will rise. Yet, it is still an expectation, there is also a chance that the price does not rise or it can rise a little and then fall. Thus, you also need to put stop loss.
Also read: Trading with Flag Chart Pattern
Setting a Stop Loss
Stop-loss allows you to exit the trade if the price hits a certain point drops. Place the stop loss below the handle’s lowest point. You can also place the stop loss below the recent swing since there can be several ups and downs in the handle.
You should not put the stop loss within at the lower half of the cup since the handle always forms in the upper half of the cup.
Ideally, it should be put in the upper third of the cup to make it close to the entry point. That way you can improve your risk-reward ratio.
Exit the Trade with Profit
The target should be above the cup. For example, if the cup is between $100 and $99, then the breakout point is $100 and the target is $101.
When the right and left sides of the cup have a different height, then use the smaller height. Add it to the breakout point. For the aggressive target, use the larger height.