Cup And Handle Pattern

The new bullish move finishes approximately around the top of the prior bearish move. Then the price action begins to create the handle, which is a bearish channel type structure. Finally, you can use a buy-stop trade to take advantage of a bullish trend. This is a situation where you place a buy-stop order above the resistance. In this case, a bullish trade will be opened after the price rises above the resistance level. The ideal profit target for the Cup and Handle trading strategy would be equal to the same distance in price as measured from the initial Cup peak to the bottom of the Cup.

Now, let’s revisit the same chart using the logic of selling the supply or upper resistance line on the chart. The last time I checked, simply drawing a line up in the air means absolutely squat. The candles of the handle should have small bodies and in a very tight range. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

trading cup and handle

In this case, it is wise to use the smaller height and add it to the breakout point for a safer target. Traders can also use the larger height to achieve a more aggressive target. A stop-loss order saves traders if the price drops, even after a stock forms the cup and handle chart. The stop-loss will sell off the stocks as soon as the price goes down to a specific price set on the handle. When this pattern comes about a handle is formed on a cup, and most often it is in the shape of a triangle. The ideal position to buy is when the price breaks above the top of the shape taken by the handle.

Determining Stop Loss Level

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. Now that we have a better understanding of the structure of the pattern, we are going to summarize some trade management ideas around this pattern. Let’s take a look at a potential Cup and Handle trading system and the rules we need to follow when trading this pattern. When we get this indication, we can buy or sell the Forex pair depending on the potential of the pattern.

  • The Regular Cup and Handle Pattern is what we commonly refer to as simply the Cup and Handle Pattern.
  • In many cases, the handle is locked within a small bearish channel on the chart.
  • For experienced traders, it is easy to identify and incorporate this pattern into a trading strategy.
  • Most brokers measure the length between the highest point of the resistance and the lowest level of the cup.

As forex traders, we are constantly pressured to make profits that we sometimes lose sight of the importance of sticking to the trading plan or practicing proper risk management. 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. Then, new buyers enter the market as they see the technical setup complete, pushing the market above prior highs. The cup and handle pattern appears after a big rally where the market needs to pause and catch its breath.

We automated this backtesting process using the pattern recognition API harmonic scanner. In the above chart example, you can see how the stock made a nice round cup and had a strong handle, before continuing higher. The one thing to point out is that on the breakout, the stock used a lot of gas just to work its way through the cloud. By the time the stock closed outside of the Ichimoku cloud, it was apparent that the stock’s tank was empty. Commodity and historical index data provided by Pinnacle Data Corporation. Unless otherwise indicated, all data is delayed by 15 minutes.

Bearish Cup And Handle Pattern

Calibrate it to each stock traded by looking at prior setups on the chart and adjusting the settings so it performs how you want on those. While the price has already moved a lot, the cup and handle pattern attempts to capture upside movement following an upside breakout from the handle. In the charts below I have picked a few good examples of the pattern, and highlighted some of the traits we are looking for in a cup and handle stock.

You could hold the trade as long as the price action is located above the yellow bullish trend line. The break through the trend line is shown in the red circle on the chart, which would signal an opportune time to close out the trade in its entirety. There are a bunch of candlesticks that form the consolidation of a u bottom pattern. Once price rejects at the top of the cup, it fails and forms the handle. Once price breaks the top of the cup and holds then it’s a bullish continuation pattern.

Ways You Can Reduce Your Trading Anxiety

These movements form a ‘u’ shape on the chart – this is known as the cup. Chart patterns occur when the price of an asset moves in a way that resembles a common shape, like a triangle, rectangle, head and shoulders, or—in this case—a cup and handle. They provide a logical entry point, a stop-loss location for managing risk, and a price target for exiting a profitable trade. Here’s what the cup and handle is, how to trade it, and things to watch for to improve the odds of a profitable trade. Many cup and handle traders adhere strictly to O’Neil’s rules for construction, but there are many variations that produce reliable results. In fact, modified C&H patterns have applications in all time frames, from intraday scalping to monthly market timing.

It represents a consolidation period for a strong asset, during which traders move away from a stock, which is generally growing well. After this short-term consolidation the stock recovers its lost value and resumes its previous growth. I want to buy cup and handle breakouts when general market conditions are favorable. If most stocks are dropping, many of the cup and handle patterns that do break out will fail to reach the profit target. When studying price charts for trading patterns, our online trading platform, Next Generation, comes with a vast range of drawing tools that you can use to display your data more clearly.

trading cup and handle

We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

The cup also should be relatively shallow – it should retrace only one-third to one-half of the prior uptrend. The handle can vary more in shape, but the downtrend should not retrace more than one-third of the gains at the end of the cup. In addition, a shorter and less severe downtrend during the handle is a good indicator that the breakout will be extremely bullish. For traders scanning for a stock on the verge of a breakout, one of the signs to find is a classic cup and handle pattern. This article will cover the basics of the cup and handle pattern and introduce the key points to consider when trading the pattern. To use the cup-and-handle pattern successfully, investors must wait for the handle to form.

Lastly, illiquidity also restricts the cup and handle from fully forming as trading volume also affects an asset’s price. A cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities. The cup and handle is considered a bullish signal, with the right-hand side of the pattern typically experiencing lower trading volume.

What Is An Inverted Cup And Handle?

Once this pullback or handle is complete, we are off to the races. Rather than trying to define what a cup and handle pattern is in trading strategy words, it’s best to use a picture to illustrate the pattern. The cup can be spread out from 1 to 6 months, occasionally longer.

Thus, you can watch for price action clues in order to extend the gains from the trade. If the pattern is bearish, the signal should be a bearish break out of the handle. 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. Also notice how the pattern starts with a bullish trend, Forex dealer which gradually reverses. At the end of the reversed bearish move, the price reverses again and starts the creation of a bullish handle. The bullish Cup and Handle pattern is the one we have been discussing so far. It starts with a bearish price move, which gradually reverses.

Drawing The Cup And Handle

Knowing how to read and interpret charts is one of the most important aspects of trading. We explore the cup and handle pattern, as well as the inverted cup and handle, and show you how to trade when you recognise these patterns. As mentioned, we may see triangles, or we may also see trading ranges or channels. Below is an example of a EUR/USD cup and handle daily chart, where the handle represents a channel or trading range angled down. 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.

A good way to note this is to use the Fibonacci Retracement. The pattern happens when bulls are overpowered by bears in. As more bears come, the price moves lower to a certain point. Bulls then start coming in and take the price to the previous high.Bears come in again and push the price lower. Traders take a long position once the top of the cup breaks and holds.

The important item to note is that the right side of the cup cut through the Ichimoku cloud and even made an attempt at trying to move beyond the cloud itself. 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. Technical traders using this indicator should place a stop buy order slightly above the upper trendline of the handle part of the pattern. The rounded top are reversal patterns used to signal the end of a trend.

Over a series of articles in the early 1990’s, O’Neill defined technical requirements for the designation of the pattern formation. While traders since have amended O’Neill’s standards for the identification of a cup and handle pattern, the vast majority of traders using this pattern adhere to the original specifications. The cup-and-handle pattern is a stock trading pattern in which a share will lose value, only to regain it, briefly stabilize or even cup and handle chart pattern slightly decline before resuming growth. It can be used to spot shares potentially poised for growth if correctly identified and also caught in time. The cup-and-handle pattern can be a useful part of anoverall trading strategy, but it should be just one part – albeit a relatively risky part – of a trading strategy. As the cup is completed, price trades sideways, and a trading range is established on the right-hand side and the handle is formed.

The shakeout is healthy for the pattern because when weaker hands tend to flood a position, they are more inclined to sell as price rises or breaks out. When they are shaken out of the stock it also adds extra buyers instead of sellers when the stock officially breaks out. Trading charts are a visual instrument some investors use to track the price of an asset over time, including most often stocks. There are a variety of chart types, such as the bar and candlestick charts, but they generally all share the same format. The chart displays a range of dates or times along the horizontal or X axis, and a range of prices along the vertical or Y axis. The cup and handle pattern has been around for over 30 years and is widely followed by many technical traders.

Author: Giles Coghlan

Rahaman Bin Ujit

Hey, I am Rahaman Bin Ujit. 18 years old cool dude who loves to learn new skills. I am a Digital Creator, Blogger, and Co-founder of Zillion Media.

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