Cup And Handle Stock Chart Pattern

Make sure it doesn’t exceed the cup portion in time or size of decline. 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 holders, sending those shares into sturdier hands in the market. 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.

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. 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.

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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. A profit target is determined by measuring the distance between the bottom of the cup and the pattern’s breakout level and extending that distance upward from the breakout.

Instead of a ‘u’ shape, it forms an ‘n’ shape, with the handle bending slightly upwards on the chart. 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 purpose of our site is to help focus investors on those stocks that have good fundamentals which are forming favorable chart patterns such as the “Cup and Handle”.

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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. It then ground sideways in a consolidation pattern that lasted for more than five weeks, or close to half the time it took for the cup segment to complete. Wynn Resorts, Limited went public on the Nasdaq exchange near $11.50 in October 2002 and rose to $164.48 five years later. The subsequent decline ended within two points of the initial public offering price, far exceeding O’Neil’s requirement for a shallow cup high in the prior trend.

If the stops are too close, the trade can close on a loss, even if the breakout eventually goes in the right direction. This is a powerful chart pattern that’s used by stock traders to capture explosive breakout moves — where the stock price could increase 1000+% within a few years. Now let’s demonstrate the bullish and the bearish Cup and Handle strategy in action. Swing trading 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.

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The cup and handle is a very distinctive pattern that can appear on any financial chart. The standard interpretation of the cup and handle is that it is bullish consolidation/continuation. Cup and handles are relatively common and can appear at any timeframe. The pattern is completed when the price action breaks the resistance level formed by the peaks that form the rim of the Cup. This may take the shape of a bowl or a rounding bottom but should not be a V-shape as it should form a consolidation area or a significant support area.

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. This way, the buy order will only execute if the price breaks above the upper resistance level. https://www.bigshotrading.info/ 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.

When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with. According to O’Neil’s description, the handle should extend no longer than between one-fifth to one-quarter of the cup’s length. Note that a deeper handle retracement, rounded or otherwise, lowers the odds for a breakout because the price structure reinforces resistance at the prior high. One way to think of the inverted handle is a follow-up to an inverted cup. The inverted handle retraces the initial move, but not to the level of the original trend.

What Is The Cup And Handle Pattern?

You will see the stock begins to just go up and above the 35-period average without a care. So here you will see the volume is somewhat higher here on this bar which is the start of the cup and the high of this bar is $32.58. The stock then goes into a lull and makes a low here and then comes out of it here. At this point the stock makes a handle which is this tight formation here. So at this point you have the actual formation, the cup formation from the previous day .

This brings up a great point, in that when you are right and I mean right, the market will go in your favor quickly. Try to resist the urge to sell when a stock moves quickly in your favor, this is likely a sign that you have a real winner on your hands. Next you want to take the depth of the cup and add this from the point of the breakout. A measured move target can be obtained by measuring the distance of the pole and adding it to the apex of the pennant triangle. An ascending triangle is a high probability setup if the breakout occurs on high volume, and is more reliable than a symmetrical triangle pattern. A plan would also include a price objective where the trader would look to unload some if not all of the position to take profits.

The Handle

However in my honest opinion it is much better to go with a logical chart based stop loss based on the distinct support levels of the stock at hand. This large U-shaped pattern may look like a typical double top but for the purposes of this pattern, it is called the cup. Noting key resistance at top#1 and top#2, speculators begin to initiate short positions. From a technical perspective, this is a very important part of the pattern.

Technical traders using this indicator should place a stop buy order slightly above the upper trendline of the handle part of the pattern. FRNT developed a 12 Month Cup and Fibonacci Forex Trading then formed an 8 Week Handle before breaking out in November of 2000. FRNT then preceded to rise from $12 to $26 a share for a gain of over 100% over the next 5 Months.

The breakout should occur on high trading volume and continue above the trendline drawn from the left to the right side of the cup to provide confirmation. Again, beware cup and handle patterns that form at the end of a trend rather than partway through it, as they are less likely to signal a strong continuation. The inverted cup and handle is the opposite version of bullish cup and handle.

The second target is located on a distance equal to the size of the cup, applied again from the moment of the breakout. The Cup with Handle trigger signal is at the break out of the handle. The handle breakout acts as a confirmation of the pattern. 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. If the pattern is bearish, take the two bottoms of the cup and stretch a curved line upwards until the rounded part reaches the top of the pattern.

The fourth interaction actually breaks through the downtrend line. But if the stock breaks below the rising support level, a short trade signal would be generated. Investors typically exhibit predictable emotions when a stock price moves up and down, and these emotions can lead to trading activity that creates predictable charting patterns. This gradual and slow range is what will set the stage for the bullish trend to resume.

What Is An inverted Cup And Handle?

Once prices penetrate the low of the right lip of the cup, then a sell signal is triggered and in the chart above prices fall thereafter. 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.

When the conditions described in these 4 stages are satisfied, we have a valid CwH pattern and the stock will be placed on our CwH watchlist, CwHWatch. If the conditions change so the stock no longer meets the criteria, then the stock will be dropped from CwHWatch. The next way to trade the pattern is to wait for a break and retest. Here, you should wait for the price to retest the now-support level and place a bullish trade. Further, the pattern tells you not to worry when the price reaches at the resistance and either consolidates or starts retreating.

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• It helps improve the odds of the price moving higher after the breakout.
• A cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities.
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For example, if the distance between the bottom of the cup and handle breakout level is 20 points, a profit target is placed 20 points above the pattern’s handle. Stop-loss orders may be placed either below the handle or below the cup depending on the trader’s risk tolerance and market volatility. The image below depicts a classic cup and handle formation.

Author: Daniela Sabin Hathorn