Trading The Cup And Handle Chart Pattern For Maximum Profit

As we mentioned above, cup and handle is a long-term pattern, its formation can take up to several months, which, can be considered to be a disadvantage. So, we can say that cup and handle pattern lags behind its colleagues — such trend continuation patterns as flag or triangle. Shares and stock indices with lots of upward momentum prior to the cup and handle forming tend to produce the most favourable cup and handle patterns for trading. In this case, traders may focus on stocks or indexes that saw strong percentage advances heading into the cup and handle pattern. When the pattern is complete, a long trade could be taken when the price breaks above the handle.

cup handle chart

Second buy entry on the breakout of the initial peak from where we started drawing the cup. 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. It’s important to remember that the handle section of a Cup and Handle pattern should resemble a very narrow price range.

The handle should also show a downward slope along at least a portion of its price lows, not an upward one. This is why sifting through the charts of the market’s greatest winners is time well worth spent. The perfect pattern would have equal highs on both sides of the cup, but this is not always the case.

Cup And Handle Pattern Trading Strategy Guide

Please follow Saito-Chung on Twitter at both @SaitoChung and @IBD_DChung for more on growth stocks, charts, breakouts, sell signals, and financial markets. The handle alone needs at least five days to form, but it could go on for weeks. Make sure it doesn’t exceed the cup portion in time or size of decline. A good cup with handle should truly look like the silhouette of a nicely formed tea cup.

cup handle chart

Prices reverse in a „V“ formation rising until the high established by the right side of the cup. Kirkpatrick & Dahlquist state that typically volume decreases on the left side of the cup and then increases on the right side of the cup (2010, p. 325). When you decide to do it like that it is prudent to go with a 7 to 8% stop loss as suggested by O’Neil. Please be aware that such a fixed stop is only valid for buying breakouts. However in my honest opinion it is much better to go with a logical chart based stop loss based on the distinct support levels of the stock at hand.

Strategy #2

If you trade a bearish Cup with Handle your stop loss order should be placed above the upper level of the handle. The Cup with Handle formation has a very specific signal. This is made simpler by using a drawing tool and waiting for the price to move up and out of the cup and handle formation drawn handle pattern. A stop-loss cup and handle chart pattern can be placed below the low price point in the handle. The Big Tech share basket chart provides an example of this. Here we are looking at the H4 chart of the GBP/USD Forex pair for May 5 – June 8, 2016.

Is a cup and handle bullish?

William O’Neil’s Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. There are two parts to the pattern: the cup and the handle. The cup forms after an advance and looks like a bowl or rounding bottom.

An ‘inverted cup and handle’ is a chart pattern that indicates bearish continuation, triggering a sell signal. A V-bottom, where the price drops and then sharply rallies may also form a cup. 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.

The Cup And Handle Pattern

Also, you can see that the lower part of the up happened when the price reached a 50% Fibonacci Retracement level. This is a bullish pattern that was developed by William O’Neill, who wrote about it in a book he published in 1988. This is the H4 chart of the AUD/USD Forex pair for Sep 3-21, 2016. The image shows a bullish Cup with Handle chart figure with the blue lines on the chart. The decrease could stop a bit before the midpoint, or could go a bit below. Get trading experience risk-free with our trading simulator.

Trading and investing in financial markets involves risk. The buy point occurs when the stock breaks out or moves upward through the old point of resistance . A bull is an investor who invests in a security expecting the price will rise. Discover what bullish investors look for in stocks and other assets. Wedges are similar to triangles, but slope counter to the previous trend.

Are cup handles called ears?

Since most of the handles resemble an ear, it is sometimes used so, but informally. Therefore, Hold the cup by the ear or Take the cup by the ear can be acceptable in spoken contexts.

A cup and handle is typically considered a bullish continuation pattern. Once a cup and handle pattern forms, in order to generate a bullish trade signal, the price must break above the top of the handle that has formed. It is interpreted as an indication of bullish sentiment in the market and possible further price increases. The 60-minute cup and handle pattern offers an excellent timing tool when looking to buy a larger-scale trend that doesn’t show a low-risk entry price on the daily or weekly chart. Akamai Technologies, Inc. consolidated below $62 after pulling back to major support at the 200-day exponential moving average . It returned to resistance in early February of 2015 and dropped into a small rectangle pattern with support near $60.50.

New Ways To Trade The Cup And Handle Pattern

If the cup and handle forms after a downtrend, it could signal a reversal of the trend. 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. The smaller down waves heading into the cup and handle provide evidence that selling is tapering off, which improves the odds of an upside move if the price breaks above the handle. If the trend is up, and the cup and handle forms in the middle of that trend, the buy signal has the added benefit of the overall trend. In this case, look for a strong trend heading into the cup and handle. 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.

Can a bull flag turn bearish?

A bearish flag formation

A bear flag will look like an inverted bull flag. … In terms of managing risk, a price move above the resistance of the flag formation may be used as the stop-loss or failure level.

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 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. If the pattern is bearish, sell when the price breaks the handle downwards. If the pattern is bullish, buy when the price breaks the handle upwards. The Cup with Handle trigger signal is at the break out of the handle.

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By having the handle and stop-loss in the upper third of the cup, the stop-loss stays closer to the entry point, which helps improve the risk-reward ratio of the trade. The stop-loss represents the Forex Club risk portion of the trade, while the target represents the reward portion. Even if all other parameters come together, you should avoid stocks that break out below their 10-week moving average.

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.

The handle is made up of downward-sloping price action that soon breaks out above the upper resistance line to indicate the continuation of the original bullish trend. Nevertheless, the cup and handle pattern is simple, reliable and quite profitable. We hope that this candlestick pattern will take a worthy place in your toolkit for trading. The cup and handle pattern is a bullish continuation pattern and momentum buy signal as it breaks out of the ‘handle’ in the formation. It was originally intended to be used with high growth stocks within the ‘CAN SLIM’ system. What if I told you that taking the depth of the cup and adding it to the breakout value is the wrong way to set your price target.

Other characteristics of the pattern that have to do with its shape are also important. For instance, the cup should be round rather V-shaped, as the former indicates consolidation whereas the latter is too sharp of a reversal from the high. Pair trading on forex 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 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. As you can see from the above example, the cup is really a rounding of price action near a series of lows. 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. When you layer the volume on top of the price action, they both can look like two Us on the chart.

The breakout should produce significant volume and price expansion. With forex trading, you don’t own the underlying asset, which means you can go long or short . Get Started Learn how you can make more money with IBD’s investing tools, top-performing stock lists, and educational content.

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Synonyms, crossword answers and other related words for HALF A DANCE [cha]

But, if you noticed that the price is holding up nicely at Resistance, then it’s a sign of strength as it tells you buyers are willing to buy at these higher prices. After the Cup is formed, the market has shown signs of bottoming as it makes higher lows towards Resistance. If you have to argue your way into believing the shape is a cup, it’s not a cup. The Complete Penny Stock Course.” It answers most of the questions new traders ask me.

  • Now, that’s fine if the price made a strong momentum move into Resistance and it gets rejected strongly.
  • The right side of the handle rises higher than the left and the pattern slightly overestimates the extent of the bullish continuation after the breakout.
  • The most common chart patterns, and what they mean to you as a trader, are highlighted here.
  • Alan received his bachelor’s in psychology from the University of Pittsburgh and is the author of The Master Swing Trader.

The beginning of the price decrease and the end of the price increase are approximately on the same level. This rounded structure is the Cup portion within the pattern. The Cup and Handle pattern is aptly named because this technical pattern actually resembles a cup with a handle on the chart. The pattern starts with a price decrease, where the Forex pair gradually changes its direction. 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.

Author: Daniela Sabin Hathorn