The “cup and handle” is a well known but little understood price pattern that is typically a bullish formation.
It got its name because it looks something like a coffee cup, with a U-shaped base and a downward trending consolidation range that looks like a handle.
These patterns usually take shape over weeks or months, and the breakouts can be spectacular.
However, there are certain rules traders must follow for entering trades on cup and handle patterns.
Basically, you let the cup form first, and you wait for the pullback to form a handle.
Then, you buy the breakout into new highs. It’s simple enough.
But most traders want to “cheat.” They want a way to get in early for an even bigger gain.
If you’re one of those traders, then today’s your lucky day…
Because I’m going to show you how to do just that.
A Textbook Example
Below is a textbook cup and handle pattern in YETI Holdings, Inc. (YETI) stock.
There was a clear buy point at the $54 mark, which is marked on the chart.
But you could have bought earlier for an even better return on your money.
If done correctly, you would have already had a 14% open gain at the “official” entry point.
The “cheat” entry was at $47.50…
The idea behind this early entry set-up is to find a tight consolidation area in the lower half of the cup.
Look for the usual compression pattern as price gets tighter from left to right.
Think of it as a smaller price pattern within a larger chart formation.
When taking a cheat entry, I like to go in with half of my usual position size.
For example, if a full position size is usually 100 shares, I would only take a cheat entry on 50 shares.
Then, when the pattern completes, I will buy the other half at the official entry point.
This way, you have a profit cushion when the stock breaks out, allowing you to finance your stop loss and create a risk-free trade.
I talked about this same idea in late September with my trade in Tesla, Inc. (TSLA).
As you might recall, I scaled into that trade as well, and I noted that this was a good way to trade a volatile stock.
The small profit that you accumulate on the first half of the position can be used to “finance” the risk on the second half of the position.
After all, not every cup and handle breakout will be as “textbook” as the one we saw on YETI.
If a failed breakout were to happen, the gain on the first half of the trade that was entered in the lower half of the cup acts as a cushion to finance the risk on the second half of the trade.
Embrace the Surge,
Editor, Traders Daily Direction