Investing in the stock market is everyone’s dream. However, picking the right stock at the right time in the market is not easy. And that’s where technical analysis patterns come in handy. One such remarkable pattern that can help you make a significant profit in the stock market is the cup and handle pattern. This pattern can be used by investors to predict when the stock price will increase and when to buy. If you also want to choose the right stocks at the right times in the stock market, you need to know the cup and handle pattern. Let’s examine it in more detail and determine how this pattern can help you.
What is the cup and handle pattern?
A technical analysis chart pattern that illustrates changes in stock prices is the cup and handle pattern. Because it resembles a teacup and its handle on the chart, the cup and handle pattern got its name. In this pattern, stock prices form a cup shape after first declining in a round pattern and then gradually rising again. A tiny consolidation that resembles a handle comes next. Typically, this pattern indicates a bullish trend. This implies that there is a chance for a significant increase in the stock price when this pattern is finished. Both novice and seasoned investors can benefit greatly from this pattern.
How does the cup and handle pattern work?
We must examine this pattern in two ways in order to comprehend it. The cup is the first component. The stock price makes a circular U-shape that resembles a cup when it drops below a certain level and then gradually rises back to the same level. Several weeks to several months may pass during this process. After the cup is formed, the handle, which is the second component, moves sideways or in a slight downward trend. The handle slopes slightly downward and typically takes a few weeks to form. A strong rally is indicated when the stock price breaks out higher after the handle. Investors can profit from purchases at this time.
How to identify this pattern?
It takes some time and practice to recognize the cup and handle pattern on the chart, but it is simple. First, look for a circular U-shape on the stock chart. The cup’s depth shouldn’t be excessive, meaning that the stock price shouldn’t drop too much. The price should slightly consolidate after the cup is formed, resembling a handle. The handle should have a short duration and a slight downward tilt.To confirm the breakout, keep an eye on the volume. When the stock breaks out the upward handle, volume should indicate an upward trend.
How to make a profit from the cup and handle pattern?
The biggest advantage of this pattern is that it gives you the chance to buy the stock at the right time. The best time to purchase is when the stock breaks out of the handle upwards. To verify the breakout, the volume must be raised. The target price can then be estimated. Measure the cup’s depth, or the distance between its lowest and upper points, to determine the target price. To the breakout point, add this distance. For instance, the target price would be ₹600 if the cup’s depth was ₹100 and the breakout point was ₹500. However, remember to set a stop loss so that if the market reverses for any reason, you have a minimum loss.
Advantages of Cup and Handle Pattern
The cup and handle pattern has many advantages. The main advantage is that the cup and handle pattern is bullish, and thus it indicates the stock price might increase. This pattern also helps to investors in identifying long-term trends. Furthermore, this pattern is trustworthy because it indicates that the market is experiencing significant buying pressure. It is also simple for novice investors to comprehend and apply to their trading strategy. The likelihood of profit is further increased by the fact that this pattern works better on stocks that are already rising.
This pattern is best for investors who are interested in technical analysis and want to make long-term profits. If you’re an active trader who understands chart patterns, this pattern can be very beneficial to you. In addition, it is also useful for investors who want to catch big trends and can be a little patient. Small investors, who do not want to take much risk, can also buy stocks at the right time using this pattern. This pattern is especially good for those who want to gain experience in the stock market.
Caution while trading Cup and Handle Pattern
Although the cup and handle pattern is very effective, it is necessary to take some precautions. First, pay attention to the volume to confirm the breakout. If the volume is low, the breakout may be fake. Secondly, always set a stop loss so that if the market reverses, your loss is less. Thirdly, practice recognizing this pattern, because many times there may be a mistake of understanding the wrong pattern on the chart. You can test this pattern on a demo account so as not to make mistakes in real trading.
Conclusion
The cup and handle pattern is a big secret of success in the stock market. This pattern gives you a chance to buy the right stock at the right time, which can earn you a bumper profit. Whether you’re a new investor or an experienced trader, this pattern can become part of your trading strategy. All you need is a little patience and practice. So why so late? Open up your charting tools, look for cup and handle patterns, and take advantage of the market’s bullishness. But always be careful and take care of risk management.
Disclaimer: This article is for general information. Investing in the stock market is subject to risks. The accuracy and results of the cup and handle pattern depend on the market situation. Consult your financial advisor before investing and check market data for the latest information. The information given in the article is backed by sources such as: investopedia, Zerodha/varsity
