How to Set Entry, Stop-Loss, and Target Using the Cup and Handle Pattern

The Cup and Handle Pattern is a popular technical analysis formation that signals a potential bullish breakout after a period of consolidation. Traders use this pattern to identify profitable entry points, set stop-loss levels, and plan target prices. Understanding how to trade this pattern effectively can significantly improve your risk-reward strategy.

Understanding the Cup and Handle Pattern

A typical Cup and Handle Pattern consists of two parts:

1. The Cup: A rounded bottom resembling a "U" shape, indicating a period of consolidation.

2. The Handle: A small downward or sideways drift after the cup, representing short-term profit-taking before a breakout.

This pattern often appears after an uptrend and signals continuation of the bullish trend once the breakout occurs.

How to Set Entry Points

• Breakout Entry: Enter a trade just above the handle's resistance level once the price closes above it.

• Confirmation: Higher trading volume during the breakout confirms bullish strength.

• Avoid Early Entry: Entering too early, before the breakout, increases the risk of a false signal.

Setting Stop-Loss

• Place the stop-loss below the lowest point of the handle.

• This ensures that if the breakout fails, your loss is minimized.

• For aggressive traders, a tighter stop-loss just below the handle’s midpoint can be used with smaller positions.

Setting Target Price

• Measure the Cup Depth: Subtract the bottom of the cup from the resistance level.

• Add to Breakout Point: Add this value to the breakout level of the handle to calculate the target price.

For example, if the cup bottom is ₹100 and the resistance is ₹120, the depth is ₹20. Add this to the breakout point (₹120) → Target Price = ₹140.

🔗 Related Read: Cup and Handle Pattern: How to Trade Using Key Chart Patterns

💡 Key Tips

• Combine the pattern with volume analysis, moving averages, or RSI to confirm breakout strength.

• Avoid trading during low-volume periods or when the overall market trend is weak.

• Always follow strict risk management rules to protect capital.

Disclaimer

This article is for educational purposes only and does not constitute financial or trading advice. Trading involves risk, and you should consult a certified financial advisor before making investment decisions.