(4) Right Level To Place Stop Loss Order In An Untoward Situation
It is one of the most critical limitations of cup with handle chart pattern. Every chart pattern is likely to fail anytime during unfavorable market conditions.
Cup with handle pattern is not a different thing in this regard. Cup with handle pattern is also likely to fail during untoward market conditions.
Generally, day traders prefer to make buy positions only after bullish breakout system. After bullish breakout, the earlier resistance level will now act as a good support level.
You can safely place a stop loss order below that level. However, in an untoward situation, the stock can still hit those levels during intraday basis.
It is due to the fact that even after bullish breakout the retracement can occur below those levels to hit stop loss order of day traders. You need to play safely with cup and handle pattern especially during intraday basis.
Thus, day traders are advised to use additional indicators such as crossing of moving average to make exits.
(5) Cup With Handle Pattern Is Not Much Reliable In Illiquid Stocks
It is one of the most important limitations of cup and handle pattern. Reasonable amount of liquidity is always necessary for trading activities. In absence of liquidity, the stock can show wild moves on either side as compared to liquid stocks.
This type of trading activities is not a reliable indicator for pattern formation. It is also true when analyzing cup with handle pattern.
Cup with handle pattern formed in illiquid stocks or bonds are likely to fail anytime. Sometimes, these types of stocks can show breakout even in the absence of handle formation.
Therefore, it is quite difficult to trade such illiquid stocks successfully. Thus, you should stay away from such illiquid stocks.
- Cup & Handle Limitations: PsychologyToday