How To Trade The Cup And Handle Chart Pattern

The chart above of the Utility SPDR ETF illustrates an inverse cup and handle. After a downtrend, prices reverse in a gentle dome formation creating the cup. Prices change direction by retracing upward and then falling back to the support price level established by the low of the right lip of the cup.

Often the asset’s price will remain at its low point for weeks or even months before recovering its value. The pattern forms during as a result of consolidation a bullish movement and indicates a continuation of that bullish trend after its completion. The image above displays the standard cup and handle pattern. To trade this formation correctly, a trader should place a stop by order slightly above the upper trendline that makes up the handle.

This is when the pattern forms a handle inside a trading range. The second run at new highs usually works as the majority of sellers have been worked through and the stock breaks out to new highs. A buy signal is triggered when prices surpass the high of the right side of the cup. As you see, the price reached the first target of the pattern prior to the entry, had you waited for the candle close to enter. Sometime afterwards, the price action reaches the second target on the chart.

Golds Cup And Handle Pattern

Cup and handle patterns form as the result of consolidation after an uptrending stock tests its previous highs. At that level, traders who bought the stock near the previous highs are likely to sell, causing a gentle pullback. This pullback is then met with bullish activity, which causes the rounded bottom and rise of the right side of the cup.

  • The pattern is valid only if price convincingly breaks out with increased volume above the rim of the cup levels.
  • As the stock once again tests its highs, another pullback – the handle – is observed, but this time bullish investors are able to push the stock higher as they snap up discounted shares.
  • William O’Neil initially recognized this popular stock chart pattern in 1988.

This way, the buy order will only execute if the price breaks above the upper resistance level. This will avoid jumping into a cup and handle pattern too early by entering a false breakout. For traders who want to add a little more certainty to their trade, they should wait for the price to close above the upper trendline of the handle. William O’Neil initially recognized this popular stock chart pattern in 1988.

Here we are looking at the H4 chart of the GBP/USD Forex pair for May 5 – June 8, 2016. You will see the bearish Cup and Handle pattern on this chart. Notice that the pattern comes after a bullish trend, which means it acts as a reversal. We mentioned above the need for constructive price/volume action while the stock is building the right side of its cup. This is measured by our Right Cup Quality indicator and is a component of our overall Chart Quality metric .

Ultimately, if the price breaks above the handle, it signals an upside move. A stop-loss order gets a trader out of a trade if the price drops, instead of rallying, after buying a breakout from the cup and handle formation. The stop-loss serves to control risk on the trade by selling the position if the price declines enough to invalidate the pattern. Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with.

A Cup and Handle pattern is a bullish continuation pattern that resembles a teacup on a candle chart. The handle part is when the price pullback slightly before roars higher and continues the previous trend. The Cup and Handle pattern can take between 30 to 50 candles to form on any given time resolution.

The cup and handle pattern is a bullish continuation pattern triggered by consolidation after a strong upward trend. The pattern takes some time to develop, but is relatively straightforward to recognize and trade on once it forms. As with all chart patterns, trading volume and additional indicators should be used to confirm a breakout and continuation of the original bullish price movement. The cup and handle pattern was made popular by William O’Neil, which now has expanded into all sorts of trading scenarios. Traders have come to know the cup and handle as a bullish continuation pattern that is a highly accurate predictor of sizable breakouts. To learn more about stock chart patterns and how to take advantage of technical analysis to the fullest, be sure to check out our entire library of predictable chart patterns.

Strategy #2

Since this is on the weekly scale, the price chart appears narrower than usual, but price rounds downward forming a cup with the right cup lip at B. The handle lasts a few weeks before price begins moving up. The next week, price rockets upward about seven points. Cup and handle pattern’s advantage is a high probability of its working out, naturally, if all criteria of the truth of the pattern formation are observed. Pattern’s disadvantage is that an ideal pattern can be met rarely in Forex due to the large number of indicators necessary for its validation. I cup and handle chart pattern ideally takes place early in bull markets when the stock indexes are trading over their 200-day simple moving averages.

cup with handle formation

The bottom of the cup and handle pattern will dip about 15% to 50% from the peak. As the name suggests, the cup and handle pattern has a similar appearance to a teacup with a handle. Our team at Trading Strategy Guides is working hard to develop the most comprehensive guide on different chart pattern strategies. In order to understand the psychology of a chart pattern, please start here, Chart Pattern Trading Strategy step-by-step Guide.

Advantages And Disadvantages Of The Cup And Handle Pattern

As forex traders, we are constantly pressured to make profits that we sometimes lose sight of the importance of sticking to the trading plan or practicing proper risk management. The price target following the breakout can be estimated by measuring the distance from the right top of the cup to the bottom of the cup and adding that number to the buy point. Once the cup regains its high there’s a modest pullback as investors consolidate rather than invest.

This is made simpler by using a drawing tool and waiting for the price to move up and out of the 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.

The pattern resembles a cup of coffee or tea, which, for sure, is present near the keyboard of each trader. Prices then break the uptrend established by the right side of the cup, thus creating the handle. Prices reverse in a „V“ formation rising until the high established by the right side of the cup.

cup with handle formation

At this point, the cup and handle pattern should be evident. The handle will typically form a descending trendline – aim to enter when the price breaks above this descending trendline. Also watch for sharply increasing trade volume, as that indicates that the stock may be about to break out. Another consideration when evaluating a cup and handle pattern is trading volume.

What Is A cup And Handle?

The cup and handle pattern is a bullish continuation pattern. Now, this pattern typically has a run-up on the left side. Then it’s followed by a retracement back down, creating a cup-like bottom, or a rounded bottom. The pattern is recommended for use on timeframes from H4 or higher. 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.

Gold’s corrective low in price in 2004 was 1% below its 300-day moving average and nearly 3% above the 38% retracement from the 2001 low. The 300-day moving average is currently at $1745, which is roughly 3% higher than $1690, the 38% retracement from the 2016 low. The current cup and handle pattern is stronger than usual due to the cup’s right side exceeding the left side . The pattern is formed as a market, after an uptrend, corrects significantly but eventually bottoms and can rebound back to where the pattern began, the old high. So far, in this article, we have only highlighted when the cup and handle produced stellar results.

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Trading The Cup And Handle Chart Pattern

This option often occurs if the cup and handle is too long. The optimum size of the handle is considered when it is 5-15% below the full length of the right part of the cup. Fiduciary As can be seen in the picture above, the handle is the correction of the price to the right side of the cup. As a rule, such a correction takes the form of a flag pattern.

Usually cup and handles are considered bullish patterns. However, the bearish version can form when the pattern is inverted. The pattern can be traded on all markets and timeframes.

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.

Chart Example Of The Inverted Cup And Handle

Most are three to six months long, but can be as little as seven weeks, or as long as a year or more. Cup and handle pattern formation was preceded by a strong upward trend. This pattern is trying to capture a stock as it breaks out of its handle and starts an uptrend due to accumulation from money managers. This pattern has a higher probability of success if the breakout of the handle high happens on higher volume than the 10-day average volume of trading.

Now let’s demonstrate the bullish and the bearish Cup and Handle strategy in action. The examples below will help clear out any questions you may have related to trading the Cup and Handle pattern in Forex. If you trade a bullish Cup with Handle pattern, you should place your stop loss order below the lower level of the handle. 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.

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. Every cup and handle is slightly unique, so do not expect the exact configuration to occur in every case. So much depends on volume and volatility in effect at the moment. Economic and fundamental news also determine how acute the rounded bottom of the cup will be, and how long the handle will ensure.

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.

Author: Oscar Gonzalez