Forex Trading

Cup and Handle Pattern Example, Target, How to Use & Trade

Traders use the depth of the “cup” to estimate the potential bullish rise in the security’s price post-breakout, making it a useful tool in setting trading targets. It signifies a bearish continuation pattern with a downward breakout in the price movement. The inverse cup and handle pattern is the reversal of an upward price movement during which the asset price drops after reaching a peak.

  • 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.
  • A subsequent breakout from the handle’s trading range signals a continuation of the prior advance.
  • One should enter the trade by examining the point at which the breakout happens, that is, the price crosses the channel or triangle pattern of the handle.
  • The second target should be located at a distance that is equal to the size 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.

It is a bullish continuation pattern which means that it is usually indicative of an increase in price once the pattern is complete. The “Cup and Handle” pattern in technical analysis is characterized by a rounded ‘cup’ followed by a handle or narrow trading range. At the bottom of the cup, traders watch for volatile spikes which could signal either an uptrend or downtrend as traders struggle for control over the directional movement. When properly interpreted, patterns such as the Cup and Handle provide valuable insight into future market behavior. The Cup and Handle pattern is a bullish continuation or reversal price formation, often used to identify buying opportunities. To determine the cup and handle, follow price movements on a chart and look for the “u” shape and the downward handle.

How to successfully trade Cup and Handle pattern?

We also offer a chart scanner with pattern recognition software that works automatically to detect and highlight trends for your ease of trading. Here, it hits the resistance level, and the handle starts forming. It may resemble a flag or a pennant with a slightly downward slope, or it may be a short pullback from the preceding top. At its lowest point, stock A retraces its previous gains and reaches a price of Rs.85. After a few weeks, the stock is able to breach its resistance level and breakout to a new high of Rs.105.

A good time to buy is when the price of the asset moves up and exceeds the price levels seen previously at the top of the right side of the cup. Prior to the decline that started the cup and handle pattern, the price had advanced about 30% over several months. The upward momentum carried through following the cup and handle. Now that you’ve seen the bearish cup with handle signal, you can begin to pursue the bearish potential of the pattern. This acted as a confirmation of the bearish cup and handle formation.

If the trend is up and the cup and handle form 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.

At TSG, we believe the Cup and Handle is one of the most authentic continuation patterns. Unlike the bullish flag pattern, which is a continuation pattern, the Cup and Handle pattern takes a lot of time to develop. Opponents of the V-bottom argue that prices don’t stabilize before bottoming and believe the price may drop back to test that level. But, ultimately, if the price breaks above the handle, it signals an upside move. By having the handle and stop-loss in the upper third (or upper half) of the cup, the stop-loss stays closer to the entry point, which helps improve the risk-reward ratio of the trade.

What is the Cup and Handle Pattern in Technical Analysis

The entry point for a cup and handle pattern is to buy when the price moves above the handle formation. 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 can be placed below the low price point in the handle.

The cup and handle is a powerful and reliable chart pattern of technical analysis that frequently leads to big gains. As such, it is one of the top chart patterns we consistently target in our flagship stock and crypto swing trading services. There are several ways to approach trading the cup and handle, but the most basic is to look for entering a long position. Place a stop buy order slightly above the upper trend line of the handle. Order execution should only occur if the price breaks the pattern’s resistance. Traders may experience excess slippage and enter a false breakout using an aggressive entry.

Plan your trading

It’s important to remember to look at the chart pattern over a longer-term time frame, such as daily, weekly, and monthly charts, in order to identify the pattern correctly. Additionally, when you identify the pattern, you should wait for the handle to form completely before entering a trade. To qualify as a cup and handle pattern, the retracement of the cup should be 1/3 or less of the previous advance. The handle should have a retracement of 1/3 or less of the cup’s advance and should complete within 1-4 weeks.

How to Trade the Cup and Handle with a Low-risk Entry Point

The handle is usually the pullback from the higher end of the cup which may be rounding, triangle, or a descending channel. Usually, the pullback is about 1/3rd of the size of the prior advance. This can be formed in any timeframe from a few minutes to weekly and monthly charts. However, the higher the timeframe, the better the chances of success post-breakout. Cup and Handle patterns can be seen both as bullish continuation or reversal patterns.

A stop-loss controls the trade risk by establishing a level at which the trader should exit the trade (if the price drops instead of rising). In the cup and handle chart pattern, a stop-loss is placed at the lowest point of the handle or the lowest point of the most recent swing. The stop-loss is usually located in the upper third part of the cup, corresponding to the position of the handle. Traders begin to sell at this high point corresponding to the left edge of the cup, creating a resistance level.

The Structure of Cup and Handle Pattern

But the cup and handle pattern has a long history and was discovered by the famous trader, William J. O’Neil. When studying price charts for trading patterns, our online trading platform, Next Generation, comes with a vast range of drawing tools that you can use to display your data more clearly. This includes drawing trendlines for the handles to highlight the breakout points, notes to mark important areas, or arrows to highlight potential entry and exit points.

How to Trade the Cup and Handle

Consider a scenario where a price has recently reached a high after significant momentum but has since corrected. At this point, an investor may purchase the asset, anticipating it will bounce back to previous levels. The price then rebounds, testing the previous high resistance levels, after which it falls into a sideways trend.

Then understand the psychology behind this profitable trading pattern. The handle portion is a retracement downwards from the right side of the cup. As the name suggests, the cup and handle pattern has a similar appearance to a teacup with a handle. Since the handle must occur within the upper half of the cup, a properly placed stop-loss should not end up in the lower half of the cup formation. The stop-loss should be above $49.75 because that is the halfway point of the cup.

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