How the Cup and Handle Pattern Works

 

A  and handle design happens when the basic resource frames a diagram that looks like a  looking like a U, and a cup and handle addressed by a slight descending pattern after the . cup and handle pattern The shape is framed when there's a value wave down, which is then trailed by an adjustment period, followed again by a convention of around a similar size as the earlier pattern. This value activity is the thing that frames the distinguishing  and handle shape.William O'Neil at first perceived this famous stock diagram design in 1988. To recognize the  and handle development O'Neil claims the handle ought to broaden no longer than one-fifth to one-quarter the length of the . chart patterns The handle will stay near the earlier highs, which will crush out the short-dealers and cause new purchasers to enter the market.The development is typically started by low-exchanging volume, trailed by high-volume as the left lip structures, at that point falling volume close to the lower part of the , which at that point commences to rising volume towards the correct lip and on the breakout. This interaction can last anyplace from a couple of moments to 65 weeks, started by a descending value vacillation followed by a time of adjustment, at that point a convention that brings the costs back up nearly or equivalent to the past level before the fall.Once this happens, the the cup advances and forms a U, and the price drifts downward slightly forming the handle.The handle has to be smaller than the cup and should only indicate a slight downward trend within the trading range – not one that goes lower than one-third of the way into the cup. Investors who see a similar pattern where the handle goes deeper might want to make efforts to avoid it.

However, when the handle is of proper proportions to the side of the cup, a breakout that goes higher than the handle is an indication of a rise in price. Furthermore, it is essential to note that this isn’t always the case, and investors should use some measures to mitigate losses when putting money into these types of patterns.

How to Trade the Cup and Handle Pattern

The image above displays the standard cup and handle pattern. To trade this formation correctly, a trader should place a stop by order slightly above the upper trendline that makes up the handle. This way, the buy order will only execute if the price breaks above the upper resistance level. This will avoid jumping into a cup and handle pattern too early by entering a false breakout. For traders who want to add a little more certainty to their trade, they should wait for the price to close above the upper trendline of the handle.

Often traders try to buy the stock market patterns at a lower price once it breaks the upper trendline, hoping for the price to move back down temporarily, but here they run the risk of the price continuing to advance upward, missing the trade altogether.