Cup And Handle Pattern Trading Strategy Guide
The first target equals the size of the channel during the handle. The second target equals to the size of the cup starting from the moment of the breakout. The change in the move is so gradual that the price action creates a rounded bottom on the chart. The beginning of the price decrease and the end of the price increase are approximately on the same level.
Profits would be taken ahead of the pattern’s measuring objective. The cup and handle chart pattern does have a few limitations. Firstly, it does not occur within a specific timeframe. Sometimes it forms cup and handle chart pattern within a few days, but it can take up to a year for the pattern to fully form. Secondly, you need to learn to identify the length and depth of a true cup and handle, as there can be false signals.
How The Cup And Handle Pattern Works
The two elements create a pattern, which resembles a cup with handle on the chart. The Cup and Handle is a chart pattern, which has a bullish potential. Now let’s demonstrate the bullish and the bearish Cup and Handle strategy in action. The examples below will help clear out any questions you may have related to trading the Cup and Handle pattern in Forex. If you trade a bullish Cup with Handle pattern, you should place your stop loss order below the lower level of the handle. If you trade a bearish Cup with Handle your stop loss order should be placed above the upper level of the handle.
- However, a small discrepancy between the tops of the two trends is admissible.
- One of the key characteristics is volume will be heavy on the left, light in the middle and pick up again on the right side of the cup.
- The pattern could appear after a price increase or a price decrease.
- To improve the odds of the pattern resulting in a real reversal, look for the downside price waves to get smaller heading into the cup and handle.
- During 2016, Netgear stock rose from a low of $33.39 to $60.80 in a steep uptrend.
The price may drop slightly, then rally back up, forming another handle or breaking above the initial handle. There is also an upside-down cup and handle pattern, called the inverted or reverse cup and handle. This is a bearish pattern and it looks different to the traditional cup and handle. A cup and handle is a technical chart pattern that resembles a cup and handle where the cup is in the shape of a «u» and the handle has a slight downward drift. If price closes above the rim of the cup with a significant increase in volume, enter a long trade above $60.80. The time and shape of the cup depends on all of these things.
Chart Patterns Cup And Handle
Some traders like these types of cups, while others avoid them. Those that like them see the V-bottom as a sharp reversal of the downtrend, which shows buyers stepped in aggressively on the right side of the pattern. Opponents of the V-bottom argue that the price didn’t stabilize before bottoming, and therefore, the price may drop back to test that level. Ultimately, if the price breaks above the handle, it signals an upside move.
The “cup” formation is developed as a consolidation phase during price rallies from the round bottom formation over multiple weeks to months. The “handle” part forms due to a price correction after the cup formation and before a clear breakout to the upside. William O’Neil initially recognized this popular stock chart pattern in 1988. To identify the cup and handle formation O’Neil claims the handle should extend no longer than one-fifth to one-quarter the length of the cup. The handle will remain close to the prior highs, which will squeeze out the short-sellers and cause new buyers to enter the market. The pattern can be traded on all markets and timeframes.
When you are day trading cup and handle patterns, you must realize that not all handles are created equally. The funny thing about the formation is that while the handle is the smallest portion of the pattern, it is actually the most important. The cup and handle is one of the easiest chart patterns to identify, because we all can recognize a cup. Some of us may not be rocket scientists; however, everyone I know has used a cup in their lifetime.
Inverse Cup And Handle Sell Signal
RHI didn’t have enough gas in the tank and fell back into the cloud. Nevertheless, notice how once the handle completed and the stock sky rocketed off, the area around the cloud acted as support prior to the move up. The price target following the breakout can be estimated by measuring the distance from the right top of the cup to the bottom of the cup and adding that number to the buy point.
All price patterns are only clues, but are never 100% certain. Relying on the pattern will improve your chances for better timing of entry and exit. If it goes too long, the cup and handle might not develop as you would expect. First is the cup, a rounded bottom pattern seen over several days or weeks. The cup and handle forms as an intermediate/secondary cycle correction before the primary cycle resumes its up-trend. With over 50+ years of combined trading experience, Trading Strategy Guides offers trading guides and resources to educate traders in all walks of life and motivations.
Eventually price ‘bottoms’ & consolidates with the best patterns forming a smooth, sideways, bowl-shaped consolidation area representing the bottom of the cup. Traders are looking for signs of sellers being exhausted & buyers continuing to support the area. The right side of the cup starts once buyers take control & push Balance of trade price through the immediate resistance offered by the consolidation period. The targeted effort is a re-test of the left rim resistance of the cup. Again the price reaction into this Double Top effort on resistance is another re-tracement which subsequently establishes a trading range to create the ‘handle’ for the cup.
The two highest days set up a bearish signal, the island cluster. The handle moved price from $64.50 down to $62.50 in one week. This gradual and slow range is what will set the stage for the bullish trend to resume. People will think this is a double top which will trap some weak sellers when we finally break upwards. Normally, the handle of a tea cup can take many shapes.
The strength and the longevity of the prevailing trend is important as it will determine the success of the trade. How deep the rounded bottom goes will also influence our potential profit. Obviously, the Cup and Handle pattern can produce the best profits on the daily time frame. The pattern can be traded on the lower time frames as well.
Is A Cup And Handle Pattern Bullish?
Remember that you should always use your knowledge and risk appetite to decide if you are going to trade based on ‘buy’ or ‘sell’ signals. So far, in this article, we have only highlighted when the cup and handle produced stellar results. Well guess what folks, sometimes it’s not always sunny outside.
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For more information on this pattern, readEncyclopedia of Chart Patterns Second Edition, pictured on the right, pages 149 to 163. That chapter gives a complete review of the chart pattern, compared to what is described below. This is a move in price with top and bottom moving together and in the same direction. This brief resistance and support has the appearance of a handle to the right of the cup.
A Cup And Handle Reversal Pattern
Let C is the lowest price in range , we then superimpose a 5×5 matrix using A, B, and C as milestones. Gordon Scott has been an active investor and technical analyst of securities, futures, forex, and penny stocks for 20+ years. He is a member of the Investopedia Financial Review Board and the co-author of Investing to Win. The perfect pattern would have equal highs on both sides of the cup, but this is not always the case. Targets are placed at 62% ($68.50) and 127% ($76.60) of the height computed above the breakout levels.
Day trading is subject to significant risks and is not suitable for all investors. Any active trading strategy will result in higher trading costs than a strategy that involves fewer transactions. The stock then pulls back for several weeks or longer, but retains at least half of the prior uptrend’s gains.
Forex Trading Costs
When the forex markets are not open, the pair tends to be quieter, which means less movement, and it also means that intraday cup and handle patterns will not form as strongly. This is because there is not sufficient momentum to fuel a breakout and bullish trend. As a general rule, cup and handle patterns are bullish price formations. Founder of the term, William O’Neil identified four primary stages of this technical trading pattern. First, approximately one to three months before the “cup” pattern begins, a security will reach a new high in an uptrend.
At the top edge of the cup, the handle will then move down towards the right at an angle. After the handle forms, the stock will generally take off in an upward direction. A cup-and-handle pattern, illustrated below, is considered a bullish trading trend. It represents a consolidation period for a strong asset, during which traders move away from a stock, which is generally growing well.
Like all technical indicators, the cup and handle should be used in concert with other signals and indicators before making a trading decision. Specifically with the cup and handle, certain limitations have been identified by practitioners. First is that it can take some Dividend time for the pattern to fully form, which can lead to late decisions. While one month to one year is the typical timeframe for a cup and handle to form, it can also happen quite quickly or take several years to establish itself, making it ambiguous in some cases.
If the pattern is bearish, take the two bottoms of the cup and stretch a curved line upwards until the rounded part reaches the top of the pattern. Take the right side of the cup afterwards and draw the shape of the bullish handle. If the pattern is bullish, take the two tops of the cup and stretch a curved line downwards until the rounded part reaches the low of the pattern. Then take the right side of the cup and draw the shape of the bearish handle. The bearish Cup & Handle starts with a bullish price move, which gradually slows down and turns into a bearish move. This algorithm works extremely well when backtesting using forex and stock data provided by Finnhub stock api.
Author: Michael Sheetz