A cup and handle chart pattern is not complicated to trade. The basic trading strategy for cup and handle stock chart is simply a type of breakout strategy. Inverted cup with handle is similarly used in bearish strategies.
Simple trading rules for cup and handle
First you much analyze stock chart and find such horizontal resistance level. It will be some area, it is not only single price point. Then you have to setup appropriate entry level, where the breakout prove to be real. Enter trade after a breakout of the horizontal resistance level.
Where to place stop loss for such breakout trade? It could be little tricky. First you do not want to have too big risk based on your money management rules . And second, I found that good trades rarely go too much against, they are mostly right from the beginning. So the appropriate stop-loss has to be set under this resistance level and not very far under it.
This methodology can also define the target. Take the distance between the high and the low of the cup part of this pattern. The distance after breakout of resistance to the target level should be the same.
Tip to trade cup and handle
Include moving averages to your chart analysis if you see a cup&handle pattern. Moving averages have to support price action from the bottom side and push the price up.
The shorter the distance between the horizontal resistance price level and moving averages the better the trading setup.
Breakouts can be very explosive when distance is really short. Prices can go up quickly and can reach the target much sooner.
Cup and handle strategy example
The chart below shows a trade that was offered by cup and handle chart pattern on the YHOO daily chart. Breakout strategy worked well right after breakout of horizontal resistance area.
The second option was to use the flag that formed in a pullback after the breakout for another entry to the trade. This pullback and flag pattern offer the possibility to add into already profitable trade for position traders.