Chart Pattern #5: Cup and Handle
Presentation matters.
It’s why companies that sell products in grocery stores focus on packaging that stands out.
And there are few patterns that present better trading opportunities than the cup and handle chart pattern.
This pattern is simply chart action that looks like a tea cup. There’s a “U” shape with a handle that has the lower end drifting downwards.
It can take anywhere from seven to as long as 65 weeks to form.
And since teacups are often judged on their style and function, the best cup and handle opportunities require thorough technical analysis. You want to discern whether they pass certain criteria and standards.
What That Means for You
Technical analysts consider this chart pattern to have strong bullish signals that are usually meant for opportunities to go long.
This is perfect for position traders who like to spot trends beforehand. And that means there can be some great buying opportunities for you
Between January and March 2016, graphics chip makers Nvidia formed a cup and handle pattern. Traders who bought at the base of the cup or support level did well for themselves if they sold at the beginning of the handle before its downward drift, which represents a volume of sellers who wanted out.
How to Trade it
In order to determine whether you’ve got a quality cup and handle chart pattern, technical analysts recommend the stock should:
- Run up at least 30%
- Sell-off from a high of 15-30 percent before it hits the support level
- Buy the lowest point of the support level
- Confirm the volume of sellers and duration of the handle that is at 5 least days long and exit accordingly
Risks
The cup and handle pattern isn’t perfect and should be used with other signals and indicators before you make a trade decision.
Even though it represents a bull signal, that signal of a bull market is not a guarantee. Patience is once again required as you have to wait seven to 65 weeks for confirmation.
It’s a very long play.
And it’s definitely not for the pigs. Play it smart.