How to Trade Cup and Handle Pattern in Share Market?

This article aims to explain the cup handle pattern in the share market, how to trade it, and what to watch out for to improve your chances of success.

What is a Cup and Handle Pattern?

A Cup and Handle Pattern is a bullish continuation pattern that denotes a strengthening of a security's price followed by a breakout, which is followed by a sharp increase in the security's price. The handle denotes the moment of breakout, while the U-shaped cup denotes the period of consolidation.

Cup and handle chart patterns was credited to an American technical analyst.

“How to Make Money in Stocks”, published by William J. O'Neil in the late 1980s. O'Neil provided an in-depth analysis and identification of the cup and handle in a few spots. According to him, cup and handle chart patterns can endure from seven to sixty-five weeks (the majority are between three and six months). From the absolute peak to the low point of the price pattern, the normal percentage correction runs from 12% to 15% to 33%.

Understanding Cup and Handle Pattern

Both short periods, like 1-minute charts, and long timeframes, such as daily, weekly, and monthly charts, exhibit the cup and handle pattern. This happens when there is a downward wave, followed by a period of stabilization, and then a rise that is roughly equal in size to the prior decline. This creates a "cup" or a U-shape. The price then moves inside the handle-forming channel sideways or downward. The handle might even be triangular.

Example of Cup and Handle Pattern

The handle should be in the cup's upper third, smaller than the cup, and not extend below the bottom half. For instance, the handle should be between Rs. 100 and Rs. 99.50, ideally between Rs. 100 and Rs. 99.65, if your cup's form is between Rs. 99 and Rs. 100. Pattern trading should be avoided if the handle is too deep since it eliminates the majority of the cup's profitability.

A continuation pattern or a reversal pattern might also be visible on a cup and handle chart. A cup and handle reversal pattern develops when the price is in a downturn over time, reversing the trend and forming a bowl with a handle as the price starts to rise. When there is an uptrend, a continuation pattern appears. The price rises, shapes into a cup and handle, and then rises.

How to Trade Cup and Handle Pattern?

Many traders are interested in learning how to trade using the Cup and Handle Chart Pattern. It's important to recognize and understand the following crucial points:

1. Instead of having a sharp V pattern, the cup should form a U shape. A rounded U shape represents a tendency to rise gradually from the lowest levels.

2. The handle emerges from the cup's edge, moves downward, and ultimately breaks into a price that overcomes the obstacle. The price of the handle drops below the levels of the cup and resistance. Instead of growing overnight, the handle does so over time.

3. A bullish trend is only seen as ongoing when the upward rise from the handle is accompanied by sizable volumes.

4. Past Trend, rather than following a break-jerk, such a pattern should develop after a few months of steadily rising prices. If the pattern develops following a protracted rising trend, it can be a frail pattern with little room for growth.

5. Normally, the cup depth is up to a third of the edge price, but under exceptionally choppy circumstances, it can reach a depth of 12 deep from the edge price.

6. Similar to how the handle develops over one to two weeks, the cup often forms over one to six months or one year and is not an overnight trend or pattern. A gradual formation shows a steady tendency.

7. A trader can spot a breakout by paying close attention to the precise volume increase that follows the cup and handle emerging. A good moment to start a long position is when the stock crosses the resistance price following the breakout. Traders can also follow the resistance line. To reduce losses and profit from upswings, traders can keep the handle at the bottom.

Limitations of Cup and Handle Pattern

The cup and handle should be utilized in conjunction with other signals and technical indicators, as with all technical indicators, before making a trading decision. According to practitioners, the cup and handle are two areas with certain restrictions. First, it can take some time for the pattern to emerge fully, which might cause rushed conclusions. While a cup and handle typically form between one month and one year, it can also happen relatively rapidly or take several years to establish itself, making the time range uncertain in some situations.

Another issue is the depth of the cup-shaped part of the structure. A deeper cup can occasionally produce a misleading signal, while a shallower cup occasionally can. The cup can occasionally form without a distinctive handle. One final drawback of many technical patterns is that they might be unreliable inequities that are not liquid.

Conclusion

The Cup and Handle pattern can be a useful tool for controlling risks and locating suitable entry points in your trading plan. However, combining this pattern with additional signals and indications is essential for a thorough study. Remember that these patterns may take some time to form, so exercise patience fully. Explore Kotak Securities for knowledgeable advice and a variety of investment opportunities.