How to Trade Cup and Handle Pattern: Examples, Limitations

Also, this discussion regarding anatomy considers that a formation is already in. We are simply unpacking its components to learn the meaning of each element. It’s important to note that a cup and handle pattern may take three weeks up to one before the breakout happens. Ultimately, it is up to traders to decide if they wish to pursue cup and handle formations as part of their overall trading strategy. The security finally broke out in July 2014, with the uptrend matching the length of the cup in a perfect measured move. The rally peak established a new high that yielded a pullback retracing 50% of the prior rally, nearly identical to the prior 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.

What happens after a Cup and Handle pattern forms?

The handle should have a retracement of 1/3 or less of the cup’s advance and should complete within 1-4 weeks. The next time you come across a potential https://www.bigshotrading.info/blog/trading-courses-start-learning-how-to-trade-successfully/, use our simple 10-step checklist above to verify the pattern is valid (be sure to bookmark this page for easy reference). In order to prevent a false signal, it’s important to receive cup and handle pattern confirmation before buying. Use this simple, 10-step checklist below to discover how to identify a cup and handle pattern—the right way. The “handle” is the relatively flat part of the pattern that develops after the price has rallied back to the prior high and consolidates. Many traders make the mistake of buying oversold stocks or selling overbought stocks and suffer financial losses as a result.

The cup and handle pattern is one of the rare sighters that can actually validate the likelihood of a price surge. Here’s what you need to know, from the pattern’s anatomy, identification strategies, and complementing indicators, to real-time examples showing the best ways to trade the pattern. To help identify cup and handle patterns quickly and easily, use TradingView’s Cup & Handle Pattern Recognition tool. This tool helps you easily detect cup and handle patterns, making it much easier to identify high-probability trades. To confirm the pattern, there should be a substantial increase in volume on the breakout above the handle’s resistance.

Cup and handle

The biggest risk of trading a cup and handle is a 5% chance of not breaking even or the 63% chance it will not meet its price target. TradingView can automatically measure a cup and handle pattern and set a price target. Alternatively, to measure manually, use an arithmetic chart and plot the depth of the cup.

• Sometimes, the left side of the cup is a different height than the right.
• Chart patterns form when the price of an asset moves in a way that resembles a common shape, like a rectangle, flag, pennant, head and shoulders, or, like in this example, a cup and handle.
• A cup and handle pattern typically takes a minimum of 7 weeks to form, including the formation of the handle.
• The reverse cup and handle pattern is an upside-down cup followed by a handle and a breakout to the downside.
• Higher volume indicated that more investors are buying that asset, and higher demand could lead to higher prices in the near future.
• On the charts it looks like an upside down cup with the price of an asset on a downward trajectory moving up, stabilizing and then moving down again, followed by a handle pointing upwards.

With a typical breakout entry above the handle high, your stop loss should be not more than 7% to 10% below your entry price. Proper technical analysis puts the odds of winning in your favor, but you must always be prepared to cut your loss if the pattern fails. When the cup and handle follows through, it Cup and Handle Pattern typically generates gains of +20% to 30% over several weeks (see above). Whether you’re a seasoned trader or just getting started, mastering your day trading psychology can help you achieve your objectives. Many traders often underestimate the power of day trading psychology in achieving positive results.

Example Of A Failed Cup And Handle Chart Pattern In The Stock Market

A good strategy here would be to check for a bullish RSI divergence or a golden crossover to ensure that the bottom is in and the cup will move to the right. If you are a position trader, the idea should be to look for this chart pattern on the weekly or even monthly timeframe. Swing traders can look at daily or weekly timeframes to make accurate calls. And even though it might also work for scalping — via the minute and hourly chart — the reliability decreases here. The handle formation represents a last-ditch effort from a handful of sellers to push the prices down. Or you can consider this a breather taken by the buyers to shake out the weak hands.

In any case, the handle should retrace less than 1/3 to 1/2 the depth of the cup – the shallower the retracement, the more bullish the movement following a breakout should be. The handle can develop over one week to several months on a daily chart, although ideally completes in less than one month. The daily and weekly charts at both Investors.com and MarketSmith make heavy turnover easy to spot. Simply compare the day or week’s volume with the moving average line drawn across the volume bars. An Investors.com chart will also tell you in real time how volume is running in comparison with typical level at that time of the trading session. The handle alone needs at least five days to form, but it could go on for weeks.

Don’t make this common MISTAKE when trading the Cup and Handle pattern…

If you set your stock scanner to meet your other trading needs, then you can flip through the results until you find a chart that looks like a cup and handle. For example, a day trader may scan for stocks with a high average true range (ATR), and a swing trader might search for stocks that have performed well in recent weeks. The cup and handle pattern occurs when the price of an asset trends downward, followed by a stabilizing period. Prices then rise to an approximately equal size to the prior decline.

“Your stop loss should be placed at a level where if the market reaches it, your trading setup is invalidated”. The last thing you want to do is short the market because it’s likely to breakout higher. To form the handle, the price must approach Resistance and form a tight consolidation (otherwise known as buildup). A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Look for large increases in volume to suggest that institutional investors are getting behind the stock. The cup-and-handle pattern isn’t always reliable and should not be used in isolation.

The pattern forms during as a result of consolidation a bullish movement and indicates a continuation of that bullish trend after its completion. 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. A bullish momentum in regards to the relative strength index is when the level is around 50.