Cone and Holder Pattern is technical chart pattern where that resembles the Cone ‘v’ shaped recovery followed by a downward drift in price which resembles the cone holder.
A cone and handle is considered a bullish signal extending an uptrend, and is used to spot opportunities to go long.
Looking for a Trend Reversal from the Handle with technical indicator turning positive can be used as single and the most recent swing low can be used as a stoploss.
For Example the above picture is from USDJPY where a trend reversal is witnessed with a cone and handle pattern. Earlier ‘v shape recovery (20th Feb – 24th Mar 2020) is part of the corona virus fear, lockdown & govt stimulus period followed by a downward drift from 24th Mar 2020 onward.
Width: Generally, cones with shorter width and more longer “v” shaped bottoms provide a stronger signal.
Depth: Ideally, the cone should be overly deeper. Avoid handles that are overly deep also, as handles should form in the top half of the cup pattern. Retracement of the handle from the peek should not 0.68% of retracement.
A profit target is determined by measuring the distance between the bottom of the cup and the pattern’s breakout level, and extending that distance upward from the breakout
In the Above USDJPY example the length of the cone bottom to the the holder breakout level works out to be 6.514 and hence from the entry point (breakout level) – 107.65 the target works out to be 107.65 + 6.51 = 113.16
Limitations Of The Cone And Handle
Like all technical indicators, the cone and handle should be used in concert with other signals and indicators before making a trading decision.
And the Pattern can be unreliable on penny and illiquid stocks.
Trading Psychology Behind the Cone and Holder Pattern
The sharp ‘v’ shaped recovery is more of an institutional drive getting into overbought situation followed by inventory correction from those inventory resulting in the price based correction and thus forming the holder.
After the holder formation a bullish price based breakout shows newer market participants showing interest in breakout trading.