Trading The Cup And Handle Chart Pattern For Maximum Profit

February 28, 2020

In essence, Momentum Oscillators are the technical indicators that help identify whether an asset is in an overbought or oversold condition. Similar to the candlestick patterns, signals from these indicators, therefore, serve as great confirmation tools when trading the Cup and Handle Pattern. Therefore, to compensate for this weakness, you may benefit from adding a volatility measuring indicator to your chart pattern trading strategy. When that is not the case, you should trade the pattern with caution.

In fact, in most scenarios, such Cup and Handle Patterns are best left untouched, as the accuracy of the trading signals generated by them can be really low. If the pattern is bullish, buy when the price breaks the handle Currency Risk upwards. The Cup with Handle trigger signal is at the break out of the handle. When you identify the handle breakout, you can plot the two targets of the pattern – the size of the handle and the size of the cup.

A double bottom is a bullish reversal pattern that describes the fall, then rebound, then fall, and then second rebound of a stock. One of the biggest drivers of stock prices is human emotions, particularly fear and greed. Get the inside scoop on what traders are talking about — delivered daily to your inbox. Due to going through those phases first, a proper cup and handle can ignite a multi month or even multi-year rally.

cup with handle chart pattern

The Complete Method Stock Swing Trading Course reveals more little things to look for that will improve results with these types of patterns. It also covers how to assess market conditions so you are trading when conditions are good, and saving your capital when conditions are poor. I have also shown the stop loss, entry, and profit target via the green and red boxes. The red box represents the risk (6.5%), which is the difference between the entry point and stop loss. The green box represents the profit target 22.7%, which is about 3.5x the amount risked. The point is simply to find stocks that are performing better than average , and eliminate stocks from the list that aren’t strong.

The breakout should produce significant volume and price expansion. If you’re not ready to start straight away, you can practise your trades on a risk-free demo account. You could also place an order above or below the handle to buy or sell when the asset reaches a more favourable price. An order allows you to open a position at a price you choose, rather than the one currently being quoted. With forex trading, you don’t own the underlying asset, which means you can go long or short . Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors.

A continuation pattern is another trade opportunity to watch for. It is when a handle forms, as described above, but within the context of a big strong uptrend . Additionally, you must remember that even if the price does pull through to form a Cup and Handle Pattern, the resulting bullish breakout that you expect in this strategy may never occur. The price may just continue to move sideways, or it could decline. Therefore, it is critical that you look for a few bullish confirmation signals before entering these breakout trades.

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Technical traders looking at stock prices over a longer time period will have no trouble spotting a cup and handle pattern. Before jumping in, take the time to look at the volume behind the trading action and establish the strength of the pattern. Setting entry and exit targets is the easy part, provided the cup and handle pattern culminates in a bullish continuation like you expect it to.

Typically, the time it takes for the construction of a handle to complete is less than that needed for the construction of the Cup. The Cup and Handle Pattern goes through four stages of development and takes a long time to develop. That being said, depending on your particular trading strategy, the portion of the pattern that is tradable can vary. Fiduciary In the construction of a Cup and Handle Pattern, the time that it takes for the pattern’s base to form can be very variable. Depending on the timeframe that you are trading in, the construction of the pattern’s base can take anywhere between several hours to several months to complete. Following this, the price of the security starts to rise again.

Finding Cup And Handle

Investing involves risk, including the possible loss of principal. The security posts a significant high in an uptrend that accelerated between one and three months cup with handle chart pattern prior. The unique three river is a candlestick pattern composed of three specific candles, and it may lead to a bullish reversal or a bearish continuation.

cup with handle chart pattern

This means the inverted cup and handle is the opposite of the regular cup and handle. Instead of a ‘u’ shape, it forms an ‘n’ shape, with the handle bending slightly upwards on the chart. Chart patterns occur when the price of an asset moves in a way that resembles a common shape, like a triangle, rectangle, head and shoulders, or—in this case—a cup and handle. They provide a logical entry point, a stop-loss location for managing risk, and a price target for exiting a profitable trade. The cup and handle pattern is an extremely valuable pattern that is easy to recognize once familiar with it.

Advantages And Limitations Of Trading With The Cup And Handle Pattern

A cup and handle is a technical indicator where the price movement of a security resembles a “cup” followed by a downward trending price pattern. This drop, or “handle” is meant to signal a buying opportunity to go long on a security. When this part of the price formation is over, the security may reverse course and reach new highs. Typically, cup and handle patterns fall between seven weeks to over a year. 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.

  • Alan received his bachelor’s in psychology from the University of Pittsburgh and is the author of The Master Swing Trader.
  • The pattern could appear after a price increase or a price decrease.
  • A double bottom is a bullish reversal pattern that describes the fall, then rebound, then fall, and then second rebound of a stock.
  • There is also an upside-down cup and handle pattern, called the inverted or reverse cup and handle.
  • 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.

The second example is another classic cup and handle pattern that develops over three to four months, with the handle forming over approximately two weeks. The cup retraces slightly more than half the preceding movement, which is relatively mature prior to the cup and handle pattern’s formation. The right side of the handle rises higher than the left and the pattern slightly overestimates the extent of the bullish continuation after the breakout. The cup and handle pattern is one of the oldest chart patterns you will find in technical analysis. In my experience, it’s also one of the more reliable chart patterns, as it takes quite some time for the formation to setup.

Finally, you can use a buy-stop trade to take advantage of a bullish trend. This is a situation where you place a buy-stop order above the resistance. In this case, a bullish trade will be opened after the price rises above the resistance level. Third, it shows you the potential level to watch out when the price experiences a bullish breakout.

Is There A Bearish Cup And Handle Pattern?

Results are not guaranteed and may vary from person to person. Trading involves inherent risks, including the loss of your Investment capital or even beyond that. Past market performance is not indicative of future results. Any investment is solely at your own risk, you assume full responsibility.

How To Trade Cup And Handle Patterns

The pattern begins after a well-liked stock rallies to a new high following a positive fundamental development. As the stock surges investors feel increasingly comfortable paying higher prices but there comes a point when the “story” of the stock fails to convert new believers. Slowly, the stock begins to drift lower as those seeking to lock-in profits outnumber those intrigued by the story. Although most of the fundamental news is still positive, many investors begin to question if the stock really is worth the prevailing market price and over time a substantial decline begins.

How To Trade The Cup And Handle Chart Pattern

As a trend matures, the chances that the cup and handle forms decrease, while any cup and handle that does form is likely to produce a smaller continuation movement with less upside potential. Inverted cup and handle patterns are also possible during downtrends and signal bearish continuations. 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. To identify the cup and handle pattern, start by following the price movements on a chart. The pattern starts to form when there is a sharp downward price movement over a short time.

A good cup with handle should truly look like the silhouette of a nicely formed tea cup. The handle always shows a smaller decline from high to low; it represents a final shakeout of uncommitted Investment holders, sending those shares into sturdier hands in the market. According to O’Neil’s description, the handle should extend no longer than between one-fifth to one-quarter of the cup’s length.

What Happens After A Cup And Handle Pattern??

The first is that it can take some time for the pattern to fully form, which can lead to late decisions. While one month to one year is the typical timeframe for a cup and handle to form, it can also happen quite quickly or take several years to establish itself, making it ambiguous in some cases. Here are seven of the top bullish chart patterns that technical analysts use to buy stocks.

Author: Callum Cliffe