Indicator Free Trading of Cup and Handle Pattern - A Case Study
The above chart is the daily chart of Bharat Electronics. Here we can observe that the stock has formed a Cup and Handle Pattern. Now I shall elaborate in detail on how to trade the Cup and Handle Pattern with appropriate Trading strategy and Psychology.
In the above chart, we can observe a stiff resistance at 160 levels for the stock. Hence it needs to be hit multiple times to make it weak and finally give a breakout. In case of a Cup and Handle Pattern, the resistance is hit a minimum of 3 times, before giving a breakout. In this case, we observe an ideal scenario which may not be the case always.
How to Trade Cup and Handle Pattern?
Trading Strategems:
When to enter?
There can be 2 fundamental ways to trade the stock.
1. Take Entry as as soon as stock breaks out of the pattern (Entry 1) i.e. at 161-163. Generally an experienced trader or a trader with good risk appetite takes entry here.
Trading Tip - Even if you have good risk appetite, do not take trade as soon as the breakout occurs. Wait for a daily green candle to close above the breakout levels and enter the next day when the previous breakout candles's high is taken out.
2. Wait for Retest of previous resistance and then take an entry (Entry 2) i.e. at 173. Generally a beginner or a safe trader takes entry here.
Trading Tip - Wait for a green bullish candle (ideally a bullish green hammer candle with a good tail) to form at the retest levels. Take entry on the next day, only when the previous bullish green hammer's candle's high is taken out.
Where should be the Stop Loss?
In every trade, we should give utmost and primary importance to Stop Loss rather than target. Only after calculating our Stop Loss, we can assess our Risk and accordingly plan the Reward or Profit. In this case, there can be 2 different SL levels for above 2 strategies:
1. For Entry 1, the stop loss should be a little below the handle i.e. 140.
2. For Entry 2, our stop loss becomes a bit less i.e at 160
Trading Tip - Do not give SL at exact levels from where the stock has bounced back. For example - In entry 1, it is better to give SL at 138 rather than 140 so that minor fluctuations do not hit our SL and then move upward. Similarly in entry 2, it is better to give Sl at 160 rather than 162.
What should be the Target?
In general, the target is calculated by calculating the depth of the cup. In this case, the depth of the cup ranges from Rs 120 - 160 i.e. Rs 40. Hence the stock will move up by Rs 40 from breakout ( or retest levels) i.e. from Rs 160 - 200. Hence our ideal target should be Rs 200
Trading Tip - In the present times, all traders use digital charts. Hence the whole world can see that a Cup and Handle Pattern has formed. Every trader knows the ideal target is Rs 200. Thus all FIIs, DIIs, automated trading systems, retail traders, etc. would have put huge sell orders at 200 levels. Hence the stock may fall sharply as soon as it touches Rs 200 due to heavy selling or heavy supply.
Thus it is better to book profits at just below the target i.e. between Rs 195-198 so that you may not lose money.
Thank you. Please like and share the idea if you learnt something..Cheer me up!
In the above chart, we can observe a stiff resistance at 160 levels for the stock. Hence it needs to be hit multiple times to make it weak and finally give a breakout. In case of a Cup and Handle Pattern, the resistance is hit a minimum of 3 times, before giving a breakout. In this case, we observe an ideal scenario which may not be the case always.
How to Trade Cup and Handle Pattern?
Trading Strategems:
When to enter?
There can be 2 fundamental ways to trade the stock.
1. Take Entry as as soon as stock breaks out of the pattern (Entry 1) i.e. at 161-163. Generally an experienced trader or a trader with good risk appetite takes entry here.
Trading Tip - Even if you have good risk appetite, do not take trade as soon as the breakout occurs. Wait for a daily green candle to close above the breakout levels and enter the next day when the previous breakout candles's high is taken out.
2. Wait for Retest of previous resistance and then take an entry (Entry 2) i.e. at 173. Generally a beginner or a safe trader takes entry here.
Trading Tip - Wait for a green bullish candle (ideally a bullish green hammer candle with a good tail) to form at the retest levels. Take entry on the next day, only when the previous bullish green hammer's candle's high is taken out.
Where should be the Stop Loss?
In every trade, we should give utmost and primary importance to Stop Loss rather than target. Only after calculating our Stop Loss, we can assess our Risk and accordingly plan the Reward or Profit. In this case, there can be 2 different SL levels for above 2 strategies:
1. For Entry 1, the stop loss should be a little below the handle i.e. 140.
2. For Entry 2, our stop loss becomes a bit less i.e at 160
Trading Tip - Do not give SL at exact levels from where the stock has bounced back. For example - In entry 1, it is better to give SL at 138 rather than 140 so that minor fluctuations do not hit our SL and then move upward. Similarly in entry 2, it is better to give Sl at 160 rather than 162.
What should be the Target?
In general, the target is calculated by calculating the depth of the cup. In this case, the depth of the cup ranges from Rs 120 - 160 i.e. Rs 40. Hence the stock will move up by Rs 40 from breakout ( or retest levels) i.e. from Rs 160 - 200. Hence our ideal target should be Rs 200
Trading Tip - In the present times, all traders use digital charts. Hence the whole world can see that a Cup and Handle Pattern has formed. Every trader knows the ideal target is Rs 200. Thus all FIIs, DIIs, automated trading systems, retail traders, etc. would have put huge sell orders at 200 levels. Hence the stock may fall sharply as soon as it touches Rs 200 due to heavy selling or heavy supply.
Thus it is better to book profits at just below the target i.e. between Rs 195-198 so that you may not lose money.
Thank you. Please like and share the idea if you learnt something..Cheer me up!