Contents
With the Breakout Trading Strategy, your goal is to enter a trade when the price breaks out of the handle. Additionally, when trading a Regular Cup and Handle Pattern, irrespective of the direction of the prevalent trend, you would always look for a bullish or a long trading opportunity post the breakout. Market volatility is an important parameter that in a way helps determine how risky a potential investment might be.
- That being said, if you want to trade more aggressively, there is another price level that you can consider placing your stop loss at.
- Also, you can see that the lower part of the up happened when the price reached a 50% Fibonacci Retracement level.
- This is because before the price trend gives a clear indication of its future direction, it may bounce back and forth a few times.
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- This rounded structure is the Cup portion within the pattern.
That being said, depending on your particular trading strategy, the portion of the pattern that is tradable can vary. Determining the length and depth of a genuine Cup and Handle Pattern can be challenging. This can potentially result in the generation of false signals for the traders. Following this, the price of the security starts to rise again.
Estimating the extent of the continuation movement by measuring the distance between the base of the cup and the breakout slightly underestimated the movement. 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. This pullback is then met with bullish activity, which causes the rounded bottom and rise of the right side of the cup. As the stock once again tests its highs, another pullback – the handle – is observed, but this time bullish investors are able to push the stock higher as they snap up discounted shares.
Thus, you can watch for price action clues in order to extend the gains from the 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.
The upward momentum carried through following the cup and handle. The cup-and-handle pattern is a stock trading pattern in which a share will lose value, only to regain it, briefly stabilize or even slightly decline before resuming growth. It can be used to spot shares potentially poised for growth if correctly identified and also caught in time.
What Is The Cup And Handle Pattern?
If you’re not ready to start straight away, you can practise your trades on a risk-free demo account. Starting from point A, go back in time to find point B where priceB is around priceA. Let C is the lowest price in range , we then superimpose a 5×5 matrix using A, B, and C as milestones. To indentify peaks and troughs, we can use a smoothing function like moving average. The main idea of this method is to find the local extrema from price data, then define pattern via condtion of these local extrema.
This depth can then be added to the breakout point to find the projected price that should be reached as a minimum price target for this pattern. If you have an interest in cup and handle technical analysis, you may want to consider signing up for a risk-free 14 day free trial of SmarTrend – and take the guesswork out of your trading. Third, it shows you the potential level to watch out when the price experiences a bullish breakout. Most brokers measure the length between the highest point of the resistance and the lowest level of the cup.
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 . Here’s how you can find the best trading opportunities every single day using Scanz.
Trading The Cup And Handle Pattern For Best Results
We also offer a chart scanner with pattern recognition software that works automatically to detect and highlight trends for your ease of trading. 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 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. Cup and handle patterns can also occur on shorter timeframes, although trading these requires quick recognition and confirmation of the breakout at the end of the handle in order to profit.
The cup-and-handle pattern can be a useful part of anoverall trading strategy, but it should be just one part – albeit a relatively risky part – of a trading strategy. As a result of this behavior, investors generally see the handle as the place in which to buy. A stock’s price will dip while it is in the handle, but in a true cup-and-handle pattern this dip will not endure. It typically represents technical analysis rather than a shift in the stock’s fundamental value. As a result, once this post-recovery trading has finished an investor can expect the stock to resume its previous growth. A breakout from the handle’s trading range signals a continuation of the previous uptrend.
Cup and handle visible, reaching the previous resistance at 0.087 is already a nice trade while the breakout could be huge. If you’re day trading and the target is not reached by the end of the day, close the position before the market closes for the day. A trailing stop-loss may also be used to get out of a position that moves close to the target but then starts to drop again.
The handle may form over one or two weeks but may also take several months. An inverse cup and handle pattern is the exact opposite of what we have talked about. A good example of cup and handle pattern at work is to look at the long-term chart of gold. 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.
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The technical target for a cup with handle pattern is derived by adding the height of the “cup” portion of the pattern to the eventual breakout from the “handle” portion of the pattern. If the pattern is bearish, sell when the price breaks the handle downwards. 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. The take profit targets for the Cup & Handle corresponds to the two targets we mentioned earlier.
Example Of How To Use The Cup And Handle
There are two main versions of a Cup and Handle pattern – one that reverses the downward trend and the other that confirms the ongoing upward movement. In both cases, as you can see, the end trend is still a positive one. It doesn’t mean, however, that C&H always continues into the cup and handle chart pattern growing price trend. It usually results in a decisively bullish trend, and that’s why it’s so important to learn how to distinguish a Cup and Handle formation. If you know how it behaves and how to use it correctly, you can earn large profits in a relatively short span of time.
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. 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.
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The break through the trend line is shown in the red circle on the chart, which would signal an opportune time to close out the trade in its entirety. Cup and handles are two part patterns that start with a peak that sells off and forms a rounding U shape recovery back to the prior high where the sell-off began also known as Super profitability the lip of the cup. The price rejects forming a double top as a bull flag reversion forms the handle. When the bull flag triggers spiking the price through the lip, the cup and handle pattern is triggered the trend resumes the next leg higher with new highs. However, the bearish version can form when the pattern is inverted.
Shares and stock indices with lots of upward momentum prior to the cup and handle forming tend to produce the most favourable cup and handle patterns for trading. In this case, traders may focus on stocks or indexes that saw strong percentage advances heading into the cup and handle pattern. The theory behind the cup and handle pattern is that if the price tried to drop but then rebounded, there must be strong buying momentum behind the asset to continue moving higher. This could attract traders to open a position at the price rise, or at least avoid opening a short position against it. This article will explore how to identify and trade the cup and handle pattern in various financial markets. 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.
By appearance, the pattern resembles a teacup with a handle and is accordingly named. 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. The pattern forms during as a result of consolidation a bullish movement and indicates a continuation of that bullish trend after its completion.
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 and handle patterns typically are seen to occur on a daily chart after a strong trend has progressed for one or more months. As a trend matures, the chances that the cup and handle forms decrease, Venture capital while any cup and handle that does form is likely to produce a smaller continuation movement with less upside potential. 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.
Reversal Days
After the high forms on the right side of the cup, there is a pullback that forms the handle. The handle is the consolidation before breakout and can retrace up to 1/3 of the cup’s advance, but usually not more. A cup and handle is considered a bullish signal extending an uptrend, and is used to spot opportunities to go long.
Opening A Trade
The handle often takes the form of a sideways or descending channel or a triangle. Buy when the price breaks above the top of the channel or triangle. When the price moves out of the handle, the pattern is considered complete, and the price is expected to rise. For example, if a cup forms between $99 and $100, the handle should form between $100 and $99.50, and ideally between $100 and $99.65. If the handle is too deep, and it erases most of the gains of the cup, then avoid trading the pattern.
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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. This resistance happens at the level where the price reached and started falling.
The first target of the pattern equals to the size of the bearish channel around the handle, applied downwards starting from the moment of the breakout. The second target equals to the size of the cup, applied downwards starting from the moment of the breakout. The cup part of the pattern should be fairly shallow, with a rounded or flat “bottom” (not a V-shaped one), and ideally reach to the same price at the upper end of both sides. The drop of the handle part should retrace about 30% to 50% of the rise at the end of the cup.
Since that introduction, the cup and handle has been elaborated on, including by O’Neill himself. Over a series of articles in the early 1990’s, O’Neill defined technical requirements for the designation of the pattern formation. While traders since have amended O’Neill’s standards for the identification of a cup and handle pattern, the vast majority of traders using this pattern adhere to the original specifications. The cup and handle pattern is a very common pattern in technical analysis and a very bullish one. The Cup portion of the chart pattern is U-shaped and shallow relative to the price trend that preceded it.
Author: Justin McQueen