How The Cup And Handle Pattern Works

We introduce people to the world of currency trading, and provide educational content to help them learn how to become profitable traders. We’re also a community of traders that support each other on our daily trading journey. The buy point occurs when the asset breaks out or moves upward through the old point of resistance .

Therefore, we believe that the upward trend will continue as bulls attempt to retest the previous high of $1920. When it does this, we expect that there will be an indecision between the bulls and the bears, which will push the price lower before an eventual rally. The price then started to decline and reached a low of $1050 in October 2015. As you can see below, the price of gold has been on a bullish trend for years. The price reached an all-time high of $1920 on September 2011. The “handle” can only convert to a breakout when there is strong volume.

When intraday trading, cup and handles tend to perform better during active times of a specific currency pair. 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. The cup pattern typically lasts for several weeks to six months or longer, but the duration of the handle is the most important feature. The handle should complete within a month, or else it may signal that there is not enough momentum to break through the higher resistance level.

Entering A Cup And Handle Trade

Well guess what folks, sometimes it’s not always sunny outside. Any who, as the price approaches the creek or top of resistance, the stock will have a minor pullback, thus creating the handle. Once this pullback or handle is complete, we are off to the races.

The market can experience a short burst, forming a triangle portion in place of the typical handle. However, for an authentic cup and handle pattern, the handle needs to be smaller than the cup. The handle should hold steady before reaching the lower half of the cup. If cups form between, If the handle is too steep, it erases most of the gains of the cup. Since that introduction, the cup and handle has been elaborated on, including by O’Neill himself.

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. Cup and handle patterns can occur on intraday time frames. However, these trading patterns require quick recognition and breakout confirmation at the end of the handle for profits. You can find one of the formulas used for identifying cup and handle patterns using Amibroker, a stock chart analysis, and market screening software.

cup and handle formation

For additional confirmation, look for the bottom of the cup to align with a longer-term support level, such as a rising ​trendline or moving average. The other option is FinViz website and its stock screeners options. FinViz doesn’t have the same cup and handle screener on its site, but you can use similar chart patterns to locate opportunities. This tool identifies stocks with the appropriate triangle patterns that classify cup and handle patterns. A cup and handle formation is a type of pattern that can be seen on price charts from several different financial markets. Technical analysts will use this pattern as an indication that the market is about to move upward.

How To Trade Cup And Handle Patterns

The ability to read and interpret chart patterns is a useful skill for traders. These patterns can signal logical entry/exit points, and positions for placing stop-loss and take-profit orders. The cup and handle pattern is characterised by a U-shaped cup and a slight downward drift in price action, which is the handle. The cup and handle pattern was made popular by William O’Neil, which now has expanded into all sorts of trading scenarios.

What happens after an inverted cup and handle?

After completing the right side, the inverted cup-with-handle will form the handle por- tion, which in normal conditions will be a retracement up for a few days, then go side- ways, then curve back down before breaking down.

In this article, I will cover 3 strategies for trading cup and handle patterns that you will not find anywhere else on the web. A Cup and Handle pattern is a bullish continuation pattern that resembles a teacup on a candle chart. The handle part is when the price pullback slightly before roars higher and continues the previous trend. The Cup and Handle pattern can take between 30 to 50 candles to form on any given time resolution. The cup and handle pattern occurs in both small time frames, like a one-minute chart, and in large time frames, like daily, weekly, and monthly charts. It occurs when there is a price wave down, followed by a stabilizing period, followed by a rally of approximately equal size to the prior decline.

The best example of a historical cup and handle pattern is the stock market as the US exited the Great Depression. The cup lasted nine years, the handle four years, and the stock market hit the arithmetic target in four years and log target in over five years. Forex trading does not normally make use of this; rather, it makes use of other more conventional breakout confirmation methods such as breaks over the resistance. The remaining process is similar when trading the cup and handle pattern.

How To Trade The Cup And Handle Chart Pattern

In that case, an exceptional growth stock can fall 40%, 50% or more and still make a successful breakout. The cup should form smoothly, without major price declines on the left side. Sharp gains on the right side aren’t necessarily good, either. You might think that the opposite of a panic-driven exit would be a good thing. An upward-sloping handle is flawed; it represents weak demand as new buyers move into the stock at a trickling pace.

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.

As the name suggests, the cup and handle pattern has a similar appearance to a teacup with a handle. When looking at the cup, you want to make sure that it is rounded. If you are looking at a “V” shape cup, then the signal is most likely invalid.

Does head and shoulders actually work?

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However, you could opt to hold a portion of the trade for further gains if you see price action continuing to trend upwards. The yellow line on the chart is an upward trend line, which measures the bullish activity of the price action. 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. A cup-and-handle pattern is the name of a chart pattern used intechnical analysis that describes a bullish continuation trendin the price of a security, typically a stock. Traders sometimes use this pattern as a signal about when to buy the stock.

Strategy #2

Homma realized they needed a way to gauge how traders felt against the price of rice. Here we are looking at the H4 chart of the GBP/USD Forex pair for May 5 – June 8, 2016. You will see the bearish Cup and Handle pattern on this chart. Notice that the pattern comes after a bullish trend, which means it acts as a reversal. An inverse cup and handle pattern is the exact opposite of what we have talked about. The pattern happens when the price of an asset is declining.

cup and handle formation

It’s important to remember that the handle section of a Cup and Handle pattern should resemble a very narrow price range. It can be contained inside two parallel lines, or it can take the shape of a smaller rounded bottom. The bottom of the cup and handle pattern will dip about 15% to 50% from the peak.

What About An Inverted Cup And Handle Pattern?

The technical target for a cup with handle pattern is derived by adding the height of the “cup” portion of the pattern to the eventual breakout from the “handle” portion of the pattern. The handle of cup and handle patterns form on the right side. Sometimes the handle can form down making a flag, pennant or wedge pattern.

cup and handle formation

You can use it to analyse stocks, currencies, bonds, commodities, and index funds among others. Finally, you can use a buy-stop trade to take advantage of a bullish trend. Dividend 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.

A diamond top formation is a technical analysis pattern that often occurs at, or near, market tops and can signal a reversal of an uptrend. When deciphering an advisable exit point for your cup with handle trade, add the height of the cup to the breakout point of the handle. You shouldn’t place stop-losses within the upper half of the cup. Properly placed stop-losses shouldn’t end up within the lower half of the cup formation. Keeping the handle and the stop-loss in the upper-third of the cup supports the stop-loss near the entry point, improving the trade’s risk-reward ratio.

  • For example, if a cup forms between $99 and $100, the handle should form between $100 and $99.50, and ideally between $100 and $99.65.
  • This is followed by a time where the price remains quite stable.
  • This gradual and slow range is what will set the stage for the bullish trend to resume.
  • An ‘inverted cup and handle’ is a chart pattern that indicates bearish continuation, triggering a sell signal.

Discover what bullish investors look for in stocks and other assets. When it comes to cup and handle patterns, place the stop loss at the lowest point of the handle. If the price undulates up and down within the handle, you could consider placing the stop-loss beneath the most recent swing low. Stop-loss orders help traders exit their position before it becomes too financially damaging. It works by setting a specific price, at which your broker does not let your position fall any further.

Of course the pattern has its bearish equivalent, the Inverted Cup and Handle, which we will touch upon later as well. A good example of cup and handle pattern at work is to look at the long-term chart of gold. In most cases, you should ensure that Super profitability the depth is about a third of the previous upward trend. A good way to note this is to use the Fibonacci Retracement. Further, the pattern tells you not to worry when the price reaches at the resistance and either consolidates or starts retreating.

Buy when the price breaks above the top of the channel or triangle. When the price moves out of the handle, the pattern is considered complete, and the price is expected to rise. Alan Farley is a writer and contributor for TheStreet and the editor of Hard Right Edge, one of the first stock trading websites. He is an expert in trading and technical analysis with more than 25 years of experience in the markets. Alan received his bachelor’s in psychology from the University of Pittsburgh and is the author of The Master Swing Trader.

Basic Characteristics Of The Cup With Handle

For example, if you enter a stock at $20.00 and set a $17.00 stop loss, you would automatically sell the stock if it dipped to or beneath $17.00. 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. 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. At TSG, we believe the Cup and Handle is one of the most authentic continuation patterns.

Does a cup have a handle?

A cup is a small, round container, usually with a handle, from which you drink hot drinks such as tea and coffee. A cup often rests on a saucer. … A mug is a large deep cup with straight sides and a handle, used for hot drinks.

The Inverted Cup and Handle is the bearish version that can form after a downtrend. TradingView has a smart drawing tool that allows users to visually identify this pattern on a chart. Above is an example of two cup and handles that formed in the Big Tech share basket on our Next Generation trading platform.

What is an Adam and Eve pattern?

According to Thomas Bulkowski’s Encyclopedia Of Chart Patterns, the Adam and Eve formation is characterized by a sharp and deep first bottom on high volume (Adam). The stock bounces and develops a more gentle correction, printing a second bottom (Eve) on lower volatility.

It then finds some support and moves upwards again and finds resistance around the 50% retracement. It then moves downwards and forms an inverse of a cup, rises slightly and then continues falling. The cup and handle pattern is called so because of its appearance. When looked at closely, it looks like a cup with a handle. The handle can be a small consolidation or slight pullback. The chart below shows how a cup and handle pattern look like.

Author: Jessica Dickler