A good example of cup and handle pattern at work is to look at the long-term chart of gold. If a Cup and Handle forms and is confirmed, the price should increase sharply in short- or medium-term. The Keltner Channel or KC is a technical indicator that consists of volatility-based bands set above and below a moving average.
Taking a closer look at the chart, you can see shaping up an ascending triangle breakout, and the digital asset went post-breakout. 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.
FAQ: Frequently Asked Questions about the Cup and Handle Pattern
This is measured by our Right Cup Quality indicator and is a component of our overall Chart Quality metric . Secondly, the price of the asset will stay at this stable point for a period of time. For more information on this pattern, readEncyclopedia of Chart Patterns Second Edition, pictured on the right, pages 149 to 163. That chapter gives a complete review of the chart pattern, compared to what is described below.
The cup and handle pattern is a common method you can use to analyse the trend of assets. You can use it to analyse stocks, currencies, bonds, commodities, and index funds among others. It then finds some support and moves upwards again and finds resistance around the 50% retracement. It then moves downwards and forms an inverse of a cup, rises slightly and then continues falling. The cup and handle pattern is part of the so-called continuation patterns. Other such patterns are the ascending and descending triangle pattern and bullish and bearish flags and pennants.
A Cup and Handle is a chart pattern where the price movement of an asset resembles a “cup” followed by a downward trending price pattern. A price forms this pattern as a retest of the previous high, causing selling pressure from traders who bought an asset near it. However, the decline doesn’t happen as a straight dump but looks more like a « flag », meaning buyers remain interested in the asset despite its high value. After breaking above the resistance, the price skyrockets to new highs pushed by the overall bullish sentiment. A breakout from the handle’s trading range signals a continuation of the previous uptrend. If the trend is up and the cup and handle form in the middle of that trend, the buy signal has the added benefit of the overall trend.
Now, that’s fine if the price made a strong momentum move into Resistance and it gets rejected strongly. But, if you noticed that the price is holding up nicely at Resistance, then it’s a sign of strength as it tells you buyers are willing to buy at these higher prices. Also, you can see that the lower part of the up happened when the price reached a 50% Fibonacci Retracement level. This is a bullish pattern that was developed by William O’Neill, who wrote about it in a book he published in 1988.
The Bottom and the Depth
A loose, choppy base shows the stock needs to go far for price discovery. If institutions are holding on to the stock, it won’t fall too far. Try to limit your picks to cups that are no more than 30% or 33% deep, except for those built during a bear market. In that case, an exceptional growth stock can fall 40%, 50% or more and still make a successful breakout. If there is no handle, then the cup itself must stretch a minimum six weeks.
Prior to the decline that started the cup and handle pattern, the price had advanced about 30% over several months. The upward momentum carried through following the cup and handle. This article considers why a cup with handle forms, the desirable features of the pattern and how we select them. We will also look at an example of one of the best performing cup-with-handle formations recently.
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. Let’s consider the market mechanics of a typical cup and handle scenario. A new rallyprints a high, and the price rolls over into a correction, flipping relative strength oscillators into sell cycles that encourage strong-handed longs to exit positions. New buyers enter the pullback at the 38.6% or 50% retracement level, expecting the prior uptrend to resume. The security bounces and tests the high, drawing in aggressive short-sellers who believe that a new downtrend will elicit a double top breakdown.
The “handle” is the relatively flat part of the pattern that develops after the price has rallied back to the prior high and consolidates. Thomas Bulkowski’s backtests are also lacking strict buy and sell rules, and he argues the cup and handle strategy is inferior to many other patterns. The Cup and Handle pattern is where the price initially declines, then levels off and begins to rise again, thus resembling a cup with a handle. ✅This pattern is not as popular among traders as « Head and Shoulders », « Double Top » and other classic patterns of technical analysis. In fact, the « Cup & Handle » pattern is in no way inferior to the above patterns in its reliability and, if used correctly, can bring considerable benefits to the…
If you guys wanna see some cups getting completed right now, go open the bitcoin ethereum and xrp charts. The idea behind the Cup and Handle pattern is to trade the breakout when the price breaks above the “handle”. The good thing with a buy stop order is your entry will just be above the highs of the “handle”, and if the breakout is real, that’s one of the best prices to get in. The best cup and handle patterns have a shallow retracement on the handle (not more than 1/3 of the cup). That’s why in this trading strategy guide, I want to dive deep into the Cup and Handle pattern so you, yourself, can find your own “monster” breakout trades.
However, your business depths between 1/3 to ½ the level of the prior advance are possible in volatile markets, and even cup depths retracing 2/3 of the prior advance are possible in extreme setups. The cup can develop over a period 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.
Tradeoffs of Cup and Handle Pattern
From this point forward, the bias begins to tilt gradually higher. During this phase the stock may be the subject of positive Wall Street analyst comments, a new product announcement or legal victory. As the rally gains steam sentiment improves dramatically and new buyers begin to talk about certain new highs but those that purchased the stock at or near top#1 get ready to sell.
The cup and handle indicator has long been used by traders to determine the direction in which an asset/stock may move. Additionally, it clearly defines the entry point, stop-loss, and target placement guidelines. However, it is advised to use this pattern along with other tools to make the most out of the opportunities available on the market. The cup should be more U-shaped than V-shaped, as a gentle pullback from the high is more indicative of consolidation than a sharp reversal. 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 of one to six months on daily charts, or even longer on weekly charts.
- Also consider that the breakout may have started later in the day.
- You can go down to the lower timeframe and analyze but it may or may not increase the odds of a breakout working out.
- That recovery swing may end at the old high or exceed it by a few points and then reverse, adding downside fuel because it traps two groups of buyers.
- Are you ready to discover the secret to spotting profitable trading opportunities?
- In order to prevent a false signal, it’s important to receive cup and handle pattern confirmation before buying.
O’Neil included https://business-oppurtunities.com/ frame measurements for each component, as well as a detailed description of the rounded lows that give the pattern its unique teacup appearance. A double bottom pattern is a technical analysis charting pattern that characterizes a major change in a market trend, from down to up. A bull is an investor who invests in a security expecting the price will rise. Discover what bullish investors look for in stocks and other assets.
The bears have the upper hand here, and as they sell, prices will fall. Cup and Handle Pattern is often considered a bullish signal, with the handle usually experiencing lower trading volume. However, there is also the other side of this pattern, the reverse cup and handle, which represents a bearish trade. The cup and handle pattern is where the price initially declines, then levels off and begins to rise again, thus resembling a cup with a handle.
No technical pattern works all the time, which is why a stop-loss is used to control the risk on trades that are less efficient. The cup forms after an advance and looks like a bowl or rounding bottom. As the cup is completed, a trading range develops on the right-hand side and the handle is formed.
What is the Cup and Handle Pattern?
In these cases, it’s important to use stop-loss orders to manage your risk and have a soundtrading strategyfor getting out. William O’Neilfound that stocks generally move about 20-25% in between bases. So, after a cup and handle pattern forms, traders may expect the stock to move higher by about 20-25%. 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.
When intraday trading, cup and handles tend to perform better during active times of a specific currency pair. When the forex markets are not open, the pair tends to be quieter, which means less movement, and it also means that intraday cup and handle patterns will not form as strongly. This is because there is not sufficient momentum to fuel a breakout and bullish trend. A cup-and-handle pattern is the name of a chart pattern used intechnical analysis that describes a bullish continuation trendin the price of a security, typically a stock. Traders sometimes use this pattern as a signal about when to buy the stock.