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How to use the Cup-and-Handle (Bullish) Pattern in trading
Once the price breaks out from the top pattern boundary, day traders and swing traders should trade with an UP trend. Consider buying a security or a call option at the upward breakout price/entry point. To identify an exit, compute the target price for the Cup-and-Handle pattern by adding the pattern’s height (the difference between the highest high and the bottom of the cup) to the price at the right cup lip. The confirmation move is when the security moves past the breakout price above the right cup lip.
To limit potential loss when the price suddenly goes in the wrong direction, consider placing a stop order to sell at or below the breakout price.
The Cup-and-Handle (sometimes called Cup-and-Holder) pattern is formed when the price of a security initially declines and then rises to form a “U”like rounded shape (1, 2, 3, also known as the Cup). Once it forms the right lip, it is characterized by short, relatively straight price decline (from 3 to 4) forming the handle.
The declining handle potentially forms due to mounting selling pressure created when the security tests its high at the right cup lip. After the sellers give up, the security has the potential to break out to the upside.