20 Basic Rules To Analyze Cup And Handle Chart Pattern

Basic Rules To Analyze Cup And Handle Chart Pattern. Woman showing thumbsup after analyzing cup and handle chart pattern.

(12) Handle Should Be Formed In The Upper Part Of Entire Pattern With Downward Slope

It is one of the most important rules to analyze cup and handle chart pattern. Handle formation is always known to occur in the right hand side part of the cup with handle pattern. But, it should also take place in the upper part of the entire pattern.

If it is formed too low then it is likely to fail. You can check whether the handle formation is proper or not in a cup with handle pattern by utilizing “Simple Midpoint Test”.

In this method, you have to add the highest price and lowest within the handle & divide it by 2. The number obtained should be greater than the midpoint of the actual base itself.

Additionally, the handle should always be present in slightly downward direction rather than upward direction. If the lower portion in the handle is drifting or pointing upward then it is known as wedging. This type of wedging-upward characteristic or pattern is likely to fail.

This expected failure is due to the fact that such an upward-drifting handle doesn’t allow the stock to undergo needed correction to shakeout weaker shareholders. Thus, position & downward slope of handle gains significance in this pattern.

[Read Also: 11 Best Reasons For Heavy Trading Volume In Stocks]

(13) Strength Of Volume Is A Clear Indication Of Continuation Of Upward Trend After Breakout

It is one of the simplest guidelines to investigate & trade cup and handle pattern in technical charts. Cup with handle chart pattern gets completed after the bullish breakout above the handle resistance.

But, every breakout is not a legitimate breakout for bullish continuation pattern. A legitimate breakout should always be accompanied with an increase in trading volume.

Ideally, the trading volume should at least increase by 40% above the 50-day moving average. However, in case of small & midcap stocks, one can even expect the trading volume to double or even triple.

On the other hand, you should avoid stocks that breakout below their 10-week moving average.

According to a post published in Investors, one should always compare the day or week’s volume with moving average line drawn across the volume bars.

On the other hand, what should you do if volume on breakout is much lighter than usual? Sometimes, volume will pick up in the next few sessions.

In such situation, light volume in stock markets may also be a factor to consider. Thus, investors or traders need to analyze strength of volume after breakout wisely.

Image Source: Shutterstock

Image Source

  • Profit targets of cup and handle pattern: Forextraininggroup
  • Cup and Handle Pattern: Cram

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