The theory behind the cup and handle pattern is that if the price tried to drop but then rebounded, there must be strong buying momentum behind the asset to continue moving higher. This could attract traders to open a position at the price rise, or at least avoid opening a short position against it. This article will explore how to identify and trade the cup and handle pattern in various financial markets. The best place to enter a cup and handle pattern to maximize the likelihood of predicting the breakout while minimizing risk is during the handle.
A Cup and Handle can be used as an entry pattern for the continuation of an established bullish trend. The cup has a soft U-shape, retraces the prior move for about ⅓ and looks like a bowl. After forming the cup, price pulls back to about ⅓ of the cups advance, forming the handle. The full pattern is complete when price breaks out of this consolidation in the direction of the cups advance.
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. A cup and handle is considered a bullish signal extending an uptrend, and is used to spot opportunities to go long.
The handle usually moves in a channel, contained between two trendlines. During the handle, the price should not decline more than about 50% of the cup height. For example, if the bottom of the cup is $5, and the top of the cup is $6, the handle should form between $6 and $5.50. If the price drops more than 50% of the cup it could indicate that the selling is too strong, which means an immediate rise is less likely.
Throughout 2020, the hope amongst investors was that the market and economy would have a V-shaped recovery where the bounceback was as fierce as the initial decline. While the broader economy is debatable, the major stock indices clearly had a V-shaped recovery and ripped to new highs while the COVID pandemic was still raging. Currency Pair The Parabolic SAR has aligned 6 dots bellows the candlesticks to show a definite reversal in price. The RSI has its signal line at 55.01 and looking up also confirming the reversal of the market upwards. This pattern is likely to appear when the market is in an indecisive phase as a rally pauses and consolidates.
A cup and handle pattern is formed when there is a price rise followed by a fall. The price rallies back to the point where the fall started, which creates a “U” or cup shape. The price then forms the handle, which is a small trading range that should be less than one third of the size of the cup. It can be horizontal or angled down, or it may also take the form of a triangle or wedge pattern.
Once the handle was finished, Bitcoin rallied higher on increasing volume, which led to new highs. The pattern has better odds of playing out as expected if it belongs to a lagging stock in the market with declining sales and earnings growth. The chart then swings down in price as stop losses and trailing stop signals are triggered for exits.
A “buy point” for a stock is a range or price at which an investor or trader will agree to enter/purchase a stock position. This is commonly based on two general forms of evaluation: the fundamental value of a company’s stock or the price of the stock relative to it technical price trading ranges.
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.
If bears success to break the support and close a daily candle below $3260 , price can drop more to $1800. Our next strategy for the cup and handle pattern is to enter on the first pullback after the initial breakout. In the reversal cup and handle, prices start off in a prolonged downtrend, where they gradually lose momentum and become more sideways. Prices start to bottom out and form a reversal base, before leading to a change in direction. Summing up, gold is stealing the spotlight, trying to break above the $1,800 barrier and the November 2011 high, but it’s unlikely to be able to confirm this move. Silver is just a few dollars above its 2015 low and over $30 below its 2011 high, while miners are trying to get above their 2016 high – well below their 2011 high.
In the reversed inverted cup-with-handle trade, the trader can buy in after the price breaks out above the pivot point price line. This is a low-risk trade in a new bull market.
The stock then pulls back for several weeks or longer, but retains at least half of the prior uptrend’s gains. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you.
Above is an example of two cup and handles that formed in the Big Tech share basket on our Next Generation trading platform. The pattern on the left is more complex as the cup pattern is wavy and harder to identify. The pattern on the right is more traditional, with a clear cup shape, followed by a handle breakout to the upside. The cup and handle pattern is an extremely valuable pattern that is easy to recognize once familiar with it.
Today we will talk about a somewhat lesser known pattern but one that is still highly effective. I am referring to the Cup and Handle Pattern for Forex trading. The following material will outline the unique structure of this pattern as well as a strategy for successfully trading it. The entry point for a cup and handle pattern is to buy when the price moves above the handle formation.
Inverted cup and handle patterns can be identified by their large crescent shape followed by a less extreme, upward retracement. The entire pattern usually takes within 3 to 6 month to develop. These patterns are meant to serve as being indicative cup and handle chart pattern of a bearish reversal. The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. It was developed by William O’Neil and introduced in his 1988 book, How to Make Money in Stocks.
If this target is completed, you can then start pursuing the next target. The second target is located on a distance equal to the size of the cup, applied again from the moment of the breakout. The Cup with Handle trigger signal is at the break out of the handle. When you identify the handle breakout, you can plot the two targets of the pattern – the size of the handle and the size of the cup.
A double top is a reversal pattern that occurs at the peak of an upward trend and can mark the beginning of a downward trend. A Double Bottom is a reversal pattern that occurs at the peak of a downward trend and can mark the beginning of an upward trend. Since it is a bearish reversal pattern, a diamond top can indicate that a stready uptrend is about to reverse and one could short the market. This is a less common futures chart pattern pointing to a highly unstable market. If price breaks out in the opposite direction of the prior trend, the pattern is defined as “reversal”.
If the stops are too close, the trade can close on a loss, even if the breakout eventually goes in the right direction. The pattern ends when the handle reaches the same level as the highest point of the cup. If the resistance line at the top is broken, there is a good chance that a bullish breakout will ensue and the bullish trend will continue. A standard cup and handle structure should develop in a rising market. The equivalent bearish pattern is an inverted cup and handle that appears in a falling trend. Trading is risky and a large proportion of people who try trading lose money.
There are 2 main varieties of this pattern – the Margin trading pattern, and the cup and handle continuation pattern. After the cup forms and the beginning of a noticeable handle takes shape, begin to monitor trading volume closely. You might observe a steady, daily drop in volume that could potentially indicate the end of the handle’s formation is near.
First, approximately one to three months before the “cup” pattern begins, a security will reach a new high in an uptrend. Second, the security will retrace, dropping no more than 50% of the previous high creating a rounding bottom. Third, the security will rebound to its previous high, but subsequently decline, forming the “handle” part of the formation.
Traders who bought near the old high are thankful and nervous at the same time. They are thankful that prices have rebounded back to the old high, but nervous about another selloff. After a big uptrend in price (#1), the market begins to correct lower (#2), shaping the first half of the cup. The dip in #2 generally retraces about 30–50% of the length of the previous uptrend. However, there are instances where a deeper correction may take hold. At this point, the cup portion of the pattern has been created.
After a multi-day run, the shares cooled off and began to trade lower despite no real change in volume. The new highs and lows formed a pair of trend lines that resembled a flag (or pennant as they’re sometimes called). The breakout here is similar to the ascending triangle – once the upper resistance level is breached, the price is primed to run. A triangle pattern is notable when looking for breakout stocks because it’s a reversal pattern with a clearly defined level of support or resistance.
Author: John Divine