The cup and handle pattern is a formation on the price chart of an asset that resembles a cup with a handle. As its name implies, the pattern consists of two parts — the cup and the handle. Further down in the article we have several charts to show how it looks like in a chart. The cup forms after an advance and looks like a bowl or rounding bottom. As the cup is completed, a trading range develops on the right-hand side and the handle is formed.
- The cup and handle indicator has long been used by traders to determine the direction in which an asset/stock may move.
- It is a bullish continuation pattern which means that it is usually indicative of an increase in price once the pattern is complete.
- Few are as easily recognizable and give as much lead time as a cup and handle pattern.
- The Inverted Cup and Handle is the bearish version that can form after a downtrend.
- For a real trader trading on the Forex market, it is huge, because these patterns make it possible to predict the behaviour of the price.
The cup is a bowl-shaped consolidation and the handle is a short pullback followed by a breakout with expanding volume. A cup retracement of 62% may not fit the pattern requirements, but a particular stock’s pattern may still capture the essence of the Cup with Handle. 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. For example, if the distance between the bottom of the cup and handle breakout level is 20 points, a profit target is placed 20 points above the pattern’s handle.
Chart pattern: Cup with handle
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The next https://en.forexbrokerslist.site/ 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. Mid-point maximum – The mid-point of the handle should be above the mid-point of the base. Most of the handle should be above the 50-day moving average. Pullback not too steep – If in an uptrend, the bottom of the cup should be no more than 35% below the high.
Cup and Handle Pattern: How to Trade and Target with an Example
The pattern forms during as a result of consolidation a bullish movement and indicates a continuation of that bullish trend after its completion. William O’Neil initially recognized this popular stock chart pattern in 1988. To identify the cup and handle formation O’Neil claims the handle should extend no longer than one-fifth to one-quarter the length of the cup. The handle will remain close to the prior highs, which will squeeze out the short-sellers and cause new buyers to enter the market. The cup and handle pattern is generally seen as a bullish pattern and can be used by traders to identify potential buying opportunities. The pattern is created when the stock price forms a “cup” shape, followed by a brief dip (the “handle”).
The cup features a gentle pullback after a strong bullish movement and the right side of the cup reaches the same price level as the left side of the cup. The false breakout in the handle on August 13 occurs on low trading volume, demonstrating the importance of using trading volume as a method of confirming the breakout. Estimating the extent of the continuation movement by measuring the distance between the base of the cup and the breakout slightly underestimated the movement.
Stop-loss orders may be placed either below the https://forex-trend.net/ or below the cup depending on the trader’s risk tolerance and market volatility. There are several ways to approach trading the cup and handle, but the most basic is to look for entering a long position. The image below depicts a classic cup and handle formation. Place a stop buy order slightly above the upper trend line of the handle.
In the final leg of the pattern, the price breaks through the resistance level, soaring above the previous high. The chart pattern, cup with handle, is a continuation pattern formed by two rounded troughs, the first being deeper and wider than the second. 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 as a lower failure rate when compared to other chart patterns, meaning it is a good indication of what’s to come.
Yes, the cup and handle pattern is considered a bullish continuation pattern. Strong andhigh-performing growth stocksgenerally form cup and handle patterns during their bull runs. The forming of this pattern allows the stock to base or take a “breather” before its next move up and is seen as healthy action. Cup and handle patterns seen in bear markets are generally not as reliable.
How to use Moving Average and ride big trends
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. A cup-and-handle pattern, illustrated below, is considered a bullish trading trend.
Cups that are 40-49% deep is too wide, which creates too much overhead price resistance. Measuring the distance is a key step to validating the pattern. Moving average confirmation – The 50-day moving average should be above the 200-day moving average, and both moving averages should be trending higher. 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. What should you do if volume on breakout day is much lighter than usual?
No matter what the pattern ultimately looks like on a chart, the cup and handle is a classic continuation pattern. That means the handle will usually break out in significant gains, to mark continued bullish sentiment in the stock. An ‘inverted cup and handle’ is a chart pattern that indicates bearish continuation, triggering a sell signal. Most of the same general rules, such as the handle not exceeding 1/3rd of the cup, still apply. The price of the asset is expected to drop after the pattern formation is complete.
If the stop-loss is below the halfway point of the cup, avoid the trade. Ideally, it should be in the upper third of the cup pattern. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.
Furthermore, it is essential to note that this isn’t always the case, and investors should use some measures to mitigate losses when putting money into these types of patterns. The handle has to be smaller than the cup and should only indicate a slight downward trend within the trading range – not one that goes lower than one-third of the way into the cup. Investors who see a similar pattern where the handle goes deeper might want to make efforts to avoid it. A breakout is when the price moves above a resistance level or moves below a support level.
Cup and Handle Pattern Rules
Now, A https://topforexnews.org/ and handle invalidation would be if you see a large sell-off from Resistance, as it tells you the market is not ready to head higher. That’s why in this trading strategy guide, I want to dive deep into the Cup and Handle pattern so you, yourself, can find your own “monster” breakout trades. A good example of cup and handle pattern at work is to look at the long-term chart of gold.
It forms after a price rally, and its depth should be 30-50% of the rally preceding it. The shallower and more rounded the cup, the better the pattern. Of course, keep in mind that the cup and handle pattern can fail, so always use stops. Don’t risk more than 7% to 10% below your entry price—even less with an early entry point. The stock needs to show a 30% uptrend from any price point, but it must be before the base’s construction.