Trading The Cup And Handle Chart Pattern For Maximum Profit
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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. The handle of cup and handle patterns form on the right side. Sometimes the handle can form down making a flag, pennant or wedge pattern. However, it’s important to remember that patterns also break down. Cup and handle patterns are pretty common whenstock trading.
To spot a true inverted cup and handle pattern, the shape needs to be obvious and the trend line needs to curve up and then down like an upside-down cup. When this reversal pattern happens, it tells you that it is not a good probability to trade if pullback or correction is not on the way. One of the characteristics of the cup and handle pattern is that the handle must form within 10% of the old high.
It is based on the difference between your entry and stop loss, your risk tolerance, and the amount of capital you have. This article describes one type, the video includes some slight variations. cup and handle chart pattern Wait for the consolidation, in the proper spot, and wait for volume to drop off before considering an entry. Here is an example of the cup and handle pattern in a Bitcoin chart from 2019.
Set An Exit Strategy With The Cup And Handle Pattern
As soon as the price moves out of the handle, the pattern is complete and the underlying asset/stock may rise. However, it can decline as well, which is why a stop-loss is needed. The shape is formed when there’s a price wave down, which is then followed by a stabilization period, followed again by a rally of approximately the same size as the prior trend. This price action is what forms the identifying cup and handle shape. Preceding the pattern is a period of strong trend, which could be either bullish or bearish. This movement in price takes a downward sloping shape, and thus completes the first phase of pattern development.
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. You have the option to close your entire position at this second take profit target. However, you could opt to hold a portion of the trade for further gains if you see price action continuing to trend upwards. The yellow line on the chart is an upward trend line, which measures the bullish activity of the price action.
The upward momentum carried through following the cup and 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…
The Handle
The change in the move is so gradual that the price action creates a rounded bottom on the chart. The beginning of the price decrease and the end of the price increase are approximately on the same level. This rounded structure is the Cup portion within the pattern. The Cup and Handle pattern is aptly named because this technical pattern actually resembles a cup with a handle on the chart. The pattern starts with a price decrease, where the Forex pair gradually changes its direction.
- Apple is the largest company in the world with a market cap of 2 trillion.
- Geometrically speaking, this upward slope of the price move is symmetrical and roughly a mirror image to the downward price slope during the initial phase of pattern development.
- At times, the right side of the cup handle has a different height than the left.
- While the price is expected to rise, that doesn’t mean it will.
- One point of clarification, you should not worry yourself trying to come up with exact measurements for your cup and handle pattern.
Once the handle was finished, Bitcoin rallied higher on increasing volume, which led to new highs. After the market has retracted into the 30–50% zone, look for a rally to begin pressing prices back toward the old high. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
Cup With Handle: Other Examples
The handle will typically form a descending trendline – aim to enter when the price breaks above this descending trendline. Also watch for sharply increasing trade volume, as that indicates that the stock may be about to break out. Another consideration when evaluating a cup and handle pattern is trading volume. Even winning 40% of cup and handle trades can be quite profitable as long as the trader is making 3x as much on their winners as they lose on their losers.
Lina seems to be in a good value purchase zone with momentum increasing, while the project itself has solid fundamentals. Cup and handle visible, reaching the previous resistance at 0.087 is already a nice trade while the breakout could be huge. In this example, the stock RHI had a nice bottom that formed into a deep cup.
Chart Patterns Cup And Handle
The pattern on the right is more traditional, with a clear cup shape, followed by a handle breakout to the upside. For the purposes of this article, I want to introduce you to the idea of buying the cup and handle breakout when the candlestick closes above the Ichimoku cloud. For those unfamiliar with the indicator, Forex platform if the stock is able to close above the cloud convincingly, this is additional confirmation of the strength of the trend. If the stock is unable to close above the cloud, then the bears are in control and longs should step aside. Let’s walk through a few chart examples to illustrate the trading strategy.
The reverse cup and handle pattern is an upside-down cup followed by a handle and a breakout to the downside. 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. What if I told you that taking the depth of the cup and adding it to the breakout value is the wrong way to set your price target.
The subsequent recovery wave reached the prior high in 2011, nearly 10 years after the first print. The price drifts sideways or moves downward within a channel that forms the handle. With this chart pattern, the handle has to be smaller than the cup. It should not drop into the lower half of the cup; it should stay in the upper third. The cup part of the formation is created when profit taking sets in or the market itself is in a correction and the stock sells off and forms the left side of the cup to the downside. In essence, Momentum Oscillators are the technical indicators that help identify whether an asset is in an overbought or oversold condition.
Example Of How To Use The Cup And Handle
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. When looking at a regular cup and handle pattern, you’ll notice a distinct ‘u’ shape and downward handle, which is followed by a bullish continuation. This means an inverted cup and handle is the opposite of the regular cup and handle.
The stop-loss order should be set above $99, since that is the halfway point of the cup. When a stop-loss is below the halfway point, it is better to reject such trades. A cup and handle formation is considered significant when it follows an increasing price trend, ideally one that is only a few months old. The older the increase trend, the less likely it is that the cup and handle will be an accurate indicator. The trade volume should decrease along with the price during the cup and should increase rapidly near the end of the handle when the price begins to rise. The rounded part is the Cup and the small bearish channel is the handle.
Cup And Handle Pattern: Definition & Strategy
To identify the cup and handle pattern, begin by following the movement of price on the chart. The pattern forms when it notices a sharp downward price movement over a short period. This is followed by a time where the price remains quite stable.
Therefore, you can observe clues in price action so as to increase the profits of the trade. William O’Neil created this pattern and introduced it in his book, How to Make Money in Stocks, in 1988. Once this happens, the the cup advances and forms a U, and the price drifts downward slightly forming the handle. When trading this pattern, it is essential that you allow for the Cup and Handle Pattern’s construction to complete before trying to make any trades using it. If you do not do this, you stand the risk of having made an inaccurate call that could cost you a lot of money when the trade goes against you.
This is the “cup” when looking at a daily or weekly chart. In between trading stocks and forex he consults for a number of prominent financial websites and enjoys an active lifestyle. Getting in too early is probably one of the most common problems I see, and it results in getting Investment stopped out, unnecessarily, often one or two times before the actual big breakout occurs. And those losing trades can easily ruin the profitability of the strategy. But the point is that you need to define exactly how the handle will look, and at what point you will trade it.
Cup and Handle patterns can be stronger when the next logical place of resistance on the chart after the breakout is a considerable distance away. 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. 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. An inverse cup and handle pattern is the exact opposite of what we have talked about.
Next, we need to figure out an entry technique, which brings us to the next step of the Cup and Handle trading strategy. Now we move to the second component of the Cup and Handle pattern and the second step of the Cup and Handle trading strategy. The strength and the longevity of the prevailing trend is important as it will determine the success of the trade.
Sometimes, the beginning of the decrease and the end of the increase could diverge in terms of the level they are supposed to be located at. However, a small discrepancy between the tops of the two trends is admissible. We recommend that you combine it with other tools like Fibonacci and indicators like moving averages.
The price rallies back to the point where the fall started, which creates a “U” or cup shape. The price then forms the handle, which is a small trading range that should be less than one third of the size of the cup. It can be horizontal or angled down, or it may also take the form of a triangle or wedge pattern. 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 smaller down waves heading into the cup and handle provide evidence that selling is tapering off, which improves the odds of an upside move if the price breaks above the handle.
First, draw a resistance trend line encompassing the high prices of the handle. A break at the resistance trend line is your signal to buy. The second opportunity to buy is a break above the high of the handle.
You can see the CUP & HANDLE pattern played out on the larger TF. This is used in conjunction with the Stocks Over Coffee Podcast on Technical Education Cup with Handles. Apple is the largest company in the world with a market cap of 2 trillion.
Author: Justin McQueen
