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What is the Cup and Handle Pattern?There are different methodologies investors use for stock analysis. Technical analysis studies stock movement over a period of time and patterns emerging from them. Different shapes emerge as patterns that indicate a trend in price movements. One of these is the cup and handle pattern. A cup and handle pattern is formed when the charts indicate the forming of a U-shaped cup followed by a handle with a sloping shape. It is one of the most common shapes witnessed in price movements that a trader can use to his advantage. The cup and handle pattern indicates a bullish continuation movement. It gives the investor a clue that the upward trend is likely to continue. When this pattern begins to form, it signals that the upward movement is likely to appear and continue. The trader can use the bullish trend indicated by this chart in trading and make informed decisions. It was popularized by American technician Willam O’Neil, who discovered this pattern in his book “How to make money in stocks” in 1984. It is a classic chart analysis used the world over to study stock patterns and benefit from trends. How Did the Cup and Handle Pattern Form?
When a stock begins to move upwards and shows a bullish pattern, traders continue to invest in the stock’s growth and positive trend. As the stock breaches high levels, investors who came in at the beginning of the uptrend start booking profits. At this level, the upward trend halts, and the price falls with selling pressure. At this stage, the cup formation curves downwards in a bowl shape. As traders and investors continue to book profits, the cup moves lower, indicating a temporary downward cup. At these levels, savvy investors, traders, and institutions begin to pump funds into the stock at attractive levels due to the fundamentals of the stock or value buying. At these low price levels, buying comes in, and with buying pressure, the cup curvature starts moving up to reach the resistance line. At this stage, an entire curved bowl-shaped cup is seen. The handle emerging here is interesting to note and indicates human psychology. The trader who had invested at the peak of the resistance line before the stock dipped is eager to take his capital back as the stock moves up. Moment stock touches the resistance level, and this trader sells. Also, the traders who started buying at the bottom of the cup look at the resistance point as a safety level to book profits. There is selling pressure at resistance levels, and the upward cup shape is halted. The volume of stocks also identifies the cup and handle at the beginning of formation at the end of the cup curve. The volume of shares is low at the end of cup formation as the selling is not heavy here. The investors who bought at the previous resistance level their capital and sell. Short-term traders without a fundamental view sell at the seeming peak of the stock. The institutions and experienced investors hold on to the stock bout at cup bottom. The selling volumes are low and don’t push the stock price down. The buying also continues, and if large volumes of buying hold, the stock breaks the resistance level, and upward trends emerge, making a handle pattern. How to Trade Using a Cup and Handle Pattern?
As a trader, it is important to identify and understand some key points:
A cup and handle pattern is an easy and highly popular pattern used by traders in the market. Experienced traders easily spot the pattern to take advantage though a new trader may need more observation of past trends to spot this pattern. It is observed not only in shares but also in forex currency markets as well. It is easy to spot compared to other technical charts because it shows clear entry and exit points for a trader. Since the pattern emerges over a long period without sharp movements, it is relatively easy for new traders to observe and take positions. The possibility of successful trend spotting is higher in the cup and handle pattern as long as the trader applies to stop loss at the right price point and time. Combined with fundamental analysis, technical charts can be a great tool for new and experienced traders both. If you want to invest in markets with technical and fundamental knowledge, open a Demat account with us, and we will help you succeed. |
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