Cup And Handle Patterns

The stop loss order of this trade needs to be placed below the lowest point of the handle. The magenta arrows and lines represent the two targets on the chart. Now that we have a better understanding of the structure of the pattern, we are going to summarize some trade management ideas around this pattern. Let’s take a look at a potential Cup and Handle trading system and the rules we need to follow when trading this pattern. Then comes the handle, which is expressed by a bearish price move.

The full pattern is complete when price breaks out of this consolidation in the direction of the cups advance. The cup and handle pattern occurs in both small time frames, like a one-minute chart, and in large time frames, like daily, weekly, and monthly charts. It occurs when there is a price wave down, followed by a stabilizing period, followed by a rally of approximately equal size to the prior decline. It creates a U-shape, or the “cup” in our “cup and handle.” The price then moves sideways or drifts downward within a channel—that forms the handle. The image below depicts a classic cup and handle formation. Place a stop buy order slightly above the upper trend line of the handle.

Once the handle was finished, Bitcoin rallied higher on increasing volume, which led to new highs. After the market has retracted into the 30–50% zone, look for a rally to begin pressing prices back toward the old high. The content on this site is provided for informational purposes only and is not legal or professional advice. Advertised rates on this site are provided by the third party advertiser and not by us. We do not guarantee that the loan terms or rates listed on this site are the best terms or lowest rates available in the market. All lending decisions are determined by the lender and we do not guarantee approval, rates or terms for any lender or loan program.

Bulkowski On The Cup With Handle

Estimating the extent of the continuation movement by measuring the distance between the base of the cup and the breakout slightly underestimated the movement. First is the cup, which is a rounded bottom extending over time. As the shape of the cup is completed, cup and handle pattern expect the handle to emerge. As the handle declines and concludes, price reverses, moving again to the upside and setting up as a breakout from previous resistance. The cup and handle indicator is a technical pattern found on crypto price charts.

This was a relatively long handle, but once it had finished, Ethereum rallied on increasing volume. Here is an example of the cup and handle pattern in a Bitcoin chart from 2019. The risk and stop loss on the trade will be set at the low of the handle.

When evaluating whether a cup and handle pattern is real, it is important to look at the shapes of both the cup and the handle. 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.

Trading The Cup And Handle Pattern For Best Results

Not all applicants will be approved and individual loan terms may vary. Users are encouraged to use their best judgment in evaluating any third party services or advertisers on this site before submitting any information to any third party. Then, watch if price can break the top of the cup and hold.

• On this day, 345,500 shares of Winnebago were traded—almost 475% above the 50-day average trading volume of 60,100 shares.
• Once you learn what is Cup and Handle pattern you have no more excuses not to have a chance to succeed in trading.
• The daily and weekly charts at both Investors.com and MarketSmith make heavy turnover easy to spot.
• This drop, or “handle” is meant to signal a buying opportunity to go long on a security.

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 Hedge confirm a breakout and continuation of the original bullish price movement. The inverted cup is the reversal pattern indicating a momentum sell short signal signaling a bearish continuation pattern.

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This way, if the breakout fails and falls back below the handle’s low, then you can close out the trade at a small loss and move on to the next opportunity. As with any pattern, it’s important to capture the essence of the pattern more so than the particulars. The cup and handle may not capture the particulars but the essence.

The subsequent recovery wave reached the prior high in 2011, nearly four years after the first print. The handle follows the classic pullback expectation, finding support at the 50% retracement in a rounded shape, and returns to the high for a second time 14 months later. The stock broke out in October 2013 and added 90 points in the following five months. The subsequent decline ended within two points of theinitial public offering price, far exceeding O’Neil’s requirement for a shallow cup high in the prior trend. The subsequent recovery wave reached the prior high in 2011, nearly 10 years after the first print.

Expect a relatively short-term period of time in order to predict a strong continuation of the bullish trend. The “cup and handle formation” is a bullish signal pointing to a continuation of the current trend. It may extend over several weeks or even months and contains specific attributes. 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.

Cup And Handle Pattern

Spencer is an avid globetrotter who achieved financial freedom in his 20s, while trading & teaching across 60+ countries. As a former professional trader in private equity and proprietary funds, he has over 15 years of market experience, and has been featured on more than 20 occasions in the media. In the chart above, the maximum height of the cup is indicated by the blue rectangular box, which is then used as a price projection at the breakout point. To measure the target price, take the maximum height of the cup, and project that distance from the breakout point.

The older the increase trend, the less likely it is that the cup and handle will be an accurate indicator. The trade volume should decrease along with the price during the cup and should increase rapidly near the end of the handle when the price begins to rise. If the cup and handle forms after a downtrend, it could signal a reversal of the trend. To improve the odds of the pattern resulting in a real reversal, look for the downside price waves to get smaller heading into the cup and handle. The smaller down waves heading into the cup and handle provide evidence that selling is tapering off, which improves the odds of an upside move if the price breaks above the handle. A V-bottom, where the price drops and then sharply rallies may also form a cup.

Once enough time has passed , the stock is free to move higher for there is now an absence of stockholders who will sell at the first good opportunity. The trendline should be flat or slightly downward sloping. Inverted Cup & Handle patterns usually take several months and sometimes over a year to form. The best patterns possess a decent amount of symmetry with the right half of the cup mirroring the left half and the right half of the handle mirroring the left half. But while it is nice for the pattern to have a smooth even balance, it is not absolutely necessary. Also, it is important that the handle not go below the midpoint of the cup.

He founded the stock brokerage firm, William O’Neil & Co. In the reversal cup and handle, prices start off in a prolonged downtrend, where they gradually lose momentum and become more sideways. Prices start to bottom out and form a reversal base, before leading to a change in direction.

Cup And Handle Formation

The security returns to resistance for the second time and breaks out, yielding a measured move target equal to the depth of the cup. Alan Farley is a writer and contributor for TheStreet and the editor of Hard Right Edge, one of the first stock trading websites. He is an expert in trading and technical analysis with more than 25 years of experience in the markets. Alan received his bachelor’s in psychology from the University of Pittsburgh and is the author of The Master Swing Trader. A saucer, also called “rounding bottom”, refers to a technical charting pattern that signals a potential reversal in a security’s price.

In the Bitcoin example above, we are using a 4-hour chart. All of the necessary ingredients are present, including the volume spikes. During the retracement portion, you want to see increasing down in volume. On the rally portion of the cup, you want to see increasing volume.

Hence, selling the asset gradually, creating the handle (#4). After a big uptrend in price (#1), the market begins to correct lower Margin trading (#2), shaping the first half of the cup. The dip in #2 generally retraces about 30–50% of the length of the previous uptrend.

If price closes above the rim of the cup with a significant increase in volume, enter a long trade above $60.80. It is a bullish continuation pattern, which means the pattern itself leads to a continuation of the prevailing, bullish trend. A cup-with-handle base usually corrects 20% to 30% from the base’s left-side high, or 1-1/2 to two times the market average.

How To Trade

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. The two tops of the cup are approximately on the same area.

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. Traditionally, the cup has a pause, or stabilizing period, at the bottom of the cup, where the price moves sideways or forms a rounded bottom. It shows the price found a support level and couldn’t drop below it.

O’Neil included time frame measurements for each component, as well as a detailed description of the rounded lows that give the pattern its unique tea cup appearance. James Chen, CMT is an expert trader, investment adviser, and global market strategist. The ideal profit target for the Cup and Handle trading strategy would be equal to the same distance in price as measured from the initial Cup peak to the bottom of the Cup. Now that we learned what a Cup and Handle pattern is, it’s time to look beyond the price action.

Profitable Cup And Handle Trading Strategy

The chart patterns happen within a span of three to six months and volume plays a role in the completion of the pattern and the confirmation of the breakout from an uptrend. At the same time, the inverted cup top is formed when there are more sellers bidding for the price to go down. When it happens, it indicates the end of the bull markets.

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. Microsoft Corporation printed two non-traditional cup and handle patterns in 2014. It topped out at $41.66 in April and pulled back to the 38.6% retracement of the last trend leg. Price carved out a choppy but rounded bottom at that level and returned to the high in June.

Technical analysts will use this pattern as an indication that the market is about to move upward. The best place to enter a cup and handle pattern to maximize the likelihood of predicting the breakout while minimizing risk is during the handle. 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.

Author: Julia La Roche