Trading Cup With Handle

With selling pressures satiated and the flow of fundamental news decidedly bullish volume increases dramatically and the stock works toward a fresh new high. The next session Wall Street analysts make positive comments and the stock surges to a new high on dramatically increased volume. The reverse cup and handle pattern is an upside-down cup followed by a handle and a breakout to the downside. The pattern is formed by a drop, a rally, then another drop back to where the rally started. A handle forms, which should be less than a third the size of the cup.

cup handle chart

Now that charting software has made access to intraday charts easier, variations of this pattern have emerged such that it can be found within intraday chart time frames. 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.

Trading Strategy #2: Pullback Entry

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. Prices reverse in a “V” formation rising until the high established by the right side of the cup.

cup handle chart

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 . The cup and handle tells you that the price will continue with its bullish trend. It also tells you where to expect the initial resistance level.

Characteristics Of The Cup And Handle Pattern

In this case, the cup shape is inverted such that it represents a resurgence in price after a downtrend followed by a downward movement. The handle slopes upwards before breaking out sharply downward to continue the original bearish trend. Unlike other chart patterns, the cup and handle pattern does not work equally for both the bullish and bearish scenario, as it is almost exclusively found in the bullish scenario only.

cup handle chart

A stop loss order was used and priced a penny below the bottom of the cup . Here’s a list of the top five performing sell signals, based on annualized gain . Follow this step-by-step guide to learn how to scan for hot stocks on the move.

Understanding The ‚hanging Man‘ Candlestick Pattern

Rather than trying to define what a cup and handle pattern is in words, it’s best to use a picture to illustrate the pattern. The Cup and Handle is a chart pattern, which has a bullish potential. As with most if not all patterns, a stop loss is needed when you trade the Cup and Handle price pattern.

Measure the distance from the cup high to the cup low and project that same distance beginning at the handle’s low point. So long as the handle remains in the upper half of the cup, this level of price projection leads to an attractive risk-to-reward ratio on the trade. The problem with the setup is that world currencies everyone uses the same approach when determining entry and exit for the formation. As you see, the price action breaks to the lower level of the S/R zone, which indicated that the price will probably continue in the bearish direction. Note the large bearish move on the chart following the breakdown.

You want to see several bullish candles with volume above the 50-period moving average, while most of the bearish candles remain below the moving average. If a large bullish and bearish volume candle are next to cup and handle formation each other, you want to see the bullish candle display a higher volume than the bearish candle. As prices approach the old high, a failed breakout traps both recent buyers and buyers at the bottom of the base.

  • The second target equals to the size of the cup, applied downwards starting from the moment of the breakout.
  • Acting as both a continuation and reversal pattern, it can mark the end of a downtrend as well as price pausing before resuming an uptrend.
  • Once the cup regains its high there’s a modest pullback as investors consolidate rather than invest.
  • We automated this backtesting process using the pattern recognition API ofHarmonicPattern.com harmonic scanner.
  • The first four components help shape the structure for the pattern’s name because they form the outline of a cup with a handle.

There aren’t a lot of fancy indicators or technical tools needed to spot the pattern. The cup and handle pattern starts with an uptrend, followed by a 30–50% correction. Use the Fibonacci retracement tool to measure out the previous uptrend, then look for the correction to retrace near the 30–50% zone.

Height Averages Of The Cup And Handle Pattern

The U-shape also demonstrates that there is strong support at the base of the cup and the cup depth should retrace less than 1/3 of the advance prior to the consolidation pullback. The cup can develop over a period Venture fund of one to six months on daily charts, or even longer on weekly charts. Ideally, the highs on the left and right side of the cup are at roughly the same price level, corresponding to a single resistance level.

How Much Does Trading Cost?

This article will explore how to identify and trade the cup and handle pattern in various financial markets. Price action is an important and common trading strategy that traders use to identify entry and exit positions. Every book and blog you can find on the web will say to just sell once this one-to-one ratio is achieved. The rounded part is the Cup and the small bearish channel is the handle.

When the pattern is complete, a long trade could be taken when the price breaks above the handle. However, some traders make the mistake of assuming that once a U-shape Hedge forms, the price will drop to form a handle. It may not, so you should ideally avoid trading the pattern until it has fully formed, in order to confirm the trend.

RSI and momentum can push this 1hr candle out of the cup resistance. Call me crazy, but actually using the technicals right in front of my face makes far more sense than applying some universal profit target system. Now, let’s revisit the same chart using the logic of selling the supply or upper resistance line on the chart. The breakout should produce significant volume and price expansion. Target 2 – equals the vertical size of the cup applied at the moment of the breakout through the handle. The Cup with Handle confirmation comes when the price breaks out of the handle.

The inverted handle pattern forms when the asset emerges out and begins to fall from the right side of an inverted cup. However, a true inverted handle happens when it fails to break down and finally meets the support level and attempts to break to a newer low. The cup and handle pattern can be found within a variety of time frames, from hourly, weekly to monthly charts. There are a couple of variations of the pattern, but they all have a similar look. Gold has formed an eleven year old cup and it’s handle is breaking out. Whenever you are looking at chart patterns and setups, try to think of things creatively.

The security returns to resistance for the second time and breaks out, yielding a measured move target equal to the depth of the cup. A cup and handle is considered a bullish signal extending an uptrend, and it is used to spot opportunities to go long. James Chen, CMT is an expert trader, investment adviser, and global market strategist. Due to the handle often taking form within a channel, traders could take a position as price moves out of the channel, placing their stop loss just underneath the low of the handle.

Author: John Divine