The cup and handle pattern is a common method you can use to analyse the trend of assets. You can use it to analyse stocks, currencies, bonds, commodities, and index funds among others. The cup with handle is to serious investors in growth stocks what the single is to a baseball fan. It’s the starting point for scoring runs and winning the investing game. 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.
The cup and handle chart pattern does have a few limitations. Sometimes it forms within a few days, but it can take up to a year for the pattern to fully form. Secondly, you need to learn to identify the length and depth of a true cup and handle, as there can be false signals.
How to Identify a Cup and Handle Pattern
The drop of the handle part should retrace about 30% to 50% of the rise at the end of the cup. For stock prices, the pattern may span from a few weeks to a few years; but commonly the cup lasts from 1 to 6 months, while the handle should only last for 1 to 4 weeks. In my opinion, the cup and handle pattern can be both a continuation pattern and a reversal pattern.
How successful is cup and handle pattern?
The good thing about Cup and handle pattern is that it has a high success ratio along with a good risk reward. But you should not forget to place your stop loss and trail your SL as the price goes up. Moreover, you should closely monitor the volume as the breakouts with low volume is less likely to sustain.
This can happen because of waning investor sentiment or insufficient buying pressure. 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 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. However, note that cup and handle pattern failure may occur more frequently in overall bearish markets.
The cup typically takes shape as a pull back and subsequent rise, with the candlesticks in the center of the cup giving it the form of a rounded bottom. 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. The Cup and Handle Pattern was first identified byWilliam O’Neil, a well-known figure in the world oftechnical analysis.
- The creation of the cup and handle formation occurs when a stock price falls but then moves back up to the point where the decline began.
- If you’re not ready to take on the live markets, you can open a risk-free demo account to identify the cup and handle pattern and practice your trades.
- The stop-loss controls risk on the trade by selling the position if the price declines enough to invalidate the pattern.
- You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose.
- Once rising prices are above the top of the cup it signals a valid buy signal.
Moving average confirmation – The 50-day moving average should be above the 200-day moving average, and both moving averages should be trending higher. At least 30-40% off the low – If the stock or crypto is not already in a strong uptrend near its high, then the price should be at least 30-40% above the 52-week low BEFORE the cup develops. Thanks man , one of the best articles on trading the cupnhandle pattern. If you guys wanna see some cups getting completed right now, go open the bitcoin ethereum and xrp charts.
A doji is a trading session where a security’s open and close prices are virtually equal. 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. Technical traders using this indicator should place a stop buy order slightly above the upper trendline of the handle part of the pattern.
What is considered bullish pattern?
Bullish: This pattern is created by three successive price declines following a significant downtrend. The lowest low (head), is flanked by two higher lows at roughly the same level (shoulders). Volume highest for first two declines, then diminishes through right shoulder.
To confirm the pattern, there should be a substantial increase in volume on the breakout above the handle’s resistance. The next time you come across a potential cup and handle pattern, use our simple 10-step checklist above to verify the pattern is valid . Early entries can benefit from tighter stops, such as several percent below the downtrend line or 20-day moving average . However, many swing traders prefer earlier entry points before the actual breakout above the handle.
Develop your trading skills
However, there is also the other side of this pattern, the reverse cup and handle, which represents a bearish trade. The cup and handle pattern is where the price initially declines, then levels off and begins to rise again, thus resembling a cup with a handle. The cup is in the shape of a “U” and the handle can be sideways or even have a slight downward drift that occurs near the “lip” of the cup. It was developed by William O Neil and first discussed in his book, How to Make Money in Stocks.
The handle should form in the upper part of the entire pattern. Greed, fear, hope, despair and other emotions drive stock prices. A trailing stop-lossmay also be used to get out of a position that moves close to the target but then starts to drop again. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science https://www.bigshotrading.info/ 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. 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.