Every cup with handle pattern is not viable. These surprising things to avoid in cup and handle pattern will prevent trapping in bad stocks.
Cup with handle is a bullish continuation pattern that can be compared to the typical shape of a tea cup. This unique yet very common chart pattern was originally introduced by William O’Neil.
But, the formation & recognition of cup and handle chart pattern is not as straightforward as it may appear to a newbie.
It does have several discrepancies that may confuse a trader or investor from time-to-time. Therefore, you need to adopt some basic rules to analyze this pattern in technical chart.
Additionally, you need to catch certain signals that are likely to fail the significance of this pattern formation. Here are 10 surprising things or trading signals of wrong cup and handle pattern:
[You can also watch an exciting video on this post from GetUpWise channel on YouTube.]
(1) Avoid Cup And Handle Pattern With Too Deep Or “V” Shaped Bases
It is one of the most significant things to avoid in cup and handle pattern. Every cup pattern either with or without handle tend to have certain amount of depth.
A cup with too little depth or excessive depth are not considered good for trading purpose. Mostly, they are likely to fail.
According to a post published in Investors, stock traders or investors should limit their picks to cups that are no more than 30% or 33% deep, except for those built during a bear market.
In extremely bearish market, an exceptional growth stock can fall up to 50% or even more but still it can make a successful breakout.
As a general rule, shallower cup is better because it shows that big hands are catching the stock. But, cup pattern with excessive depth should always be avoided.
Additionally, the cup base that is “V” shaped instead of “U” shaped pattern is also likely to fail. It is perhaps due to absence of necessary consolidation needed to shake weak shareholders before an anticipated uptrend.
Thus, traders or investors should avoid making positions in cup that are too deep or having “V” shaped bases.
- Cup and handle pattern: Cram