It shows the price found a support level and couldn’t drop below it. It helps improve the odds of the price moving higher after the breakout. Microsoft Corporation printed two non-traditional cup and handle patterns in 2014. It topped out at $41.66 in April and pulled back to the 38.6% retracement of the last trend leg.
The breakout from the handle’s trading range signals a continuation of the prior uptrend. 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.
Under normal conditions, they are not expected to signal trend reversals, but nothing is perfect in the market. There can be situations where, after the formation of the handle, the price breaks below the support level formed by the bottom of the cup, invalidating the pattern. When the pattern is complete, a long trade could be taken when the price breaks above the handle. However, some traders make the mistake of assuming that once a U-shape forms, the price will drop to form a handle. It may not, so you should ideally avoid trading the pattern until it has fully formed, in order to confirm the trend. You could wait for the price to break above the handle to signal that the uptrend is continuing.
The next pullback carves out a rounding bottom no deeper than the 50% retracement of the prior trend. We measure the price/volume action in the handle using a proprietary metric called Handle Quality , which is also a component of CQ, mentioned earlier. Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level. If the stock closes below this level for any reason the pattern becomes invalid. The rally indicated by the cup shape shows re-investment in an asset that had become undervalued.
The breakout, when it does happen, should be accompanied with a marked increase in volume in order for it to be a successful cup and handle pattern. There are several ways to approach trading the cup and handle. You need to enter a buy trade on the breakout of the handle’s resistance trend line. In this case, a trader should set the Stop Loss order slightly below the handle’s trendline. A profit target will be at the resistance trend line, connecting two highs of the cup. There isn’t a stock scanner setting you can use to find a cup and handle pattern, but the pattern is easy to recognize visually.
Cup with handle pattern
Trading the cup-and-handle pattern is one technique that stems from what is known as technical analysis. But the main alternative to this type of analysis is fundamental analysis. It focuses on how the company is doing financially and operationally and can complement the insights of technical analysis. Thirdly, the price of the asset will then recover to approximately its original value. This creates a “U” shape on the trading chart, the “cup” after which this pattern is named. The standard cup and handle pattern is a bullish signal, but there is also a bearish version of this pattern called “Inverse Cup and Handle” pattern.
The handle can be either a small, unorganized pullback, or a bear flag or pennant. In any case, the handle should retrace less than 1/3 to 1/2 the depth of the cup – the shallower the retracement, the more bullish the movement following a breakout should be. The handle can develop over one week to several months on a daily chart, although ideally completes in less than one month. One common mistake that traders make when trying to trade the cup and handle pattern is buying too early before the handle has formed. Remember, the handle should ideally form no more than 15% below the left high of the cup. If it forms any lower than this, it may be a sign that the stock is not ready to break out and move higher.
During bear markets, some good cup with handle bases show a large, double-digit decline within the handle. After the high forms on the right side of the cup, there is a pullback that forms the handle. The handle is the consolidation before breakout and can retrace up to 1/3 of the cup’s advance, but usually not more.
Step Checklist: How to Properly Identify a Cup and Handle Pattern
The breakout should occur on high trading volume and continue above the trendline drawn from the left to the right side of the cup to provide confirmation. Again, beware cup and handle patterns that form at the end of a trend rather than partway through it, as they are less likely to signal a strong continuation. Cup and handle patterns typically are seen to occur on a daily chart after a strong trend has progressed for one or more months. One of the most important chart patterns in the stock market is the Cup and Handle Pattern, invented by William O’Neill. It also holds the crowd proclaimed title as one of the most profitable and reliable breakout patterns.
The ideal position to buy is when the price breaks above the top of the shape taken by the handle. As soon as the price moves out of the handle, the pattern is complete and the underlying asset/stock may rise. However, it can decline as well, which is why a stop-loss is needed. For those unfamiliar with what a cup and handle chart looks like, the chart below is an ideal example of a Bitcoin cup and handle continuation pattern. It is also known as the bullish cup and handle pattern, signaling a potential uptrend in prices.
Cup and handle stop-losses and profit targets
Unless otherwise indicated, all data is delayed by 15 minutes. The inhttps://business-oppurtunities.com/ation provided by StockCharts.com, Inc. is not investment advice. A breakout trader looks for levels that a security hasn’t been able to move beyond, and waits for it to move beyond those levels, as it could keep moving in that direction. We mentioned above the need for constructive price/volume action while the stock is building the right side of its cup.
- Finally, you can use a buy-stop trade to take advantage of a bullish trend.
- If you ask me, it’s when the price breaks below the low of the handle, thereby invalidating the Cup and Handle pattern.
- The rally peak established a new high that yielded a pullback retracing 50% of the prior rally, nearly identical to the prior pattern.
- Taking a closer look at the chart, you can see shaping up an ascending triangle breakout, and the digital asset went post-breakout.
- Instead of a “u” shape, it forms an “n” shape with the ascending handle.
- Like all technical indicators, the cup and handle should be used in concert with other signals and indicators before making a trading decision.
There are several technical conditions that must be met before our algorithm will recognize a valid pivot. Firstly we want the stock to have attained a strong relative strength when compared to all other stocks, so we require an RS of 70 on a scale from 1-99. We also want the pivot to be approaching the left cup level, so we require the pivot price to be at least 60% of the left cup.
How to Trade the Cup and Handle
Cup handle To the right of the cup there should be a handle. The cup’s recoil handle should not rise above the top of the cup, but often tracks 30% to 60% above… If you ask me, it’s when the price breaks below the low of the handle, thereby invalidating the Cup and Handle pattern. 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.
take this career and shove it oscillators now flip into new buy cycles, encouraging a third population of longs to take risks. A positive feedback loop sets into motion, with price lifting into resistance, completing the final leg of the pattern, and breaking out in a strong uptrend. The target with the cup and handle pattern is the height of the cup added to the breakout point of the handle. Generally, these patterns are bullish signals extending an uptrend. 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.
Samantha Silberstein is a Certified Financial Planner, FINRA Series 7 and 63 licensed holder, State of California life, accident, and health insurance licensed agent, and CFA. She spends her days working with hundreds of employees from non-profit and higher education organizations on their personal financial plans. Register for a live account now or practise first with virtual funds on our demo account to familiarise yourself with the platform. The following chart, courtesy of StockCharts.com, illustrates the pattern. This pattern was created by William O’Neill who founded a stock brokerage company firm before launching the business newspaper, “Investor’s Business Daily” in 1984. He is the author of, “How to Make Money in Stocks”, 24 essential lessons for investment success.
When you identify a cup and handle pattern on smaller time frames e.g. 15-minute, zoom out to see the larger trend in higher time frames e.g. daily. The Cup and Handle pattern is often considered a bullish signal. However, there is also the reverse cup and handle, which represents a bearish trade. However, sometimes, the market closes much higher and you get a poor cup and handle pattern target entry point. This results in a wide stop loss and a smaller position size on your trade.
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For example, if a cup forms between $40 and $39, and the breakout point is $40, the exit strategy should be at $41. At times, the right side of the cup handle has a different height than the left. 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. However, it fails to continue increasing in price and instead reverses and trends downward. The above is another example of a cup and handle pattern, but in the reversal pattern, which was formed in the ETH/USD daily chart.