Trading Cup And Handle

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. After the high forms cup and handle chart pattern 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.

You may wish to alter some of the criteria discussed in this article to accommodate other markets or time frames. The cup and handle pattern is one of the oldest chart patterns you will find in technical analysis. In my experience, it’s also one of the more reliable chart patterns, as it takes quite some time for the formation to setup. In this article, I will cover 3 strategies for trading cup and handle patterns that you will not find anywhere else on the web. 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.

Cup And Handle Trading Strategy

We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism.

For example, if the cup forms between a price range of $1.0 to $2.0, then the handle needs to form within $1.50 to $2.0. If the handle pushes too low, then it will be ineffective at trapping short sellers. The cup and handle pattern can be found within a variety of time frames, from hourly, weekly to monthly charts. There are a couple of variations of the pattern, but they all have a similar look. The cup and handle indicator has been used by traders to determine the direction in which an asset/stock may move.

Do Cup And Handles Work In All Markets And Time Frames?

Here, you should wait for the price to retest the now-support level and place a bullish trade. If the pattern is bearish, the signal should be a bearish break out of the handle. 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 rounded top are reversal patterns used to signal the end of a trend.
• The profitable Cup and Handle trading strategy might be a humorous name.
• The pattern begins after a well-liked stock rallies to a new high following a positive fundamental development.
• The buy point occurs when the stock breaks out or moves upward through the old point of resistance .

By the time the stock closed outside of the Ichimoku cloud, it was apparent that the stock’s tank was empty. This algorithm works extremely well when backtesting using forex and stock data provided by Finnhub stock api. The accuracy rate for cup and handle pattern for forex and stock on Daily timeframe are 65% and 68% respectively. We automated this backtesting process using the pattern recognition API ofHarmonicPattern.com harmonic scanner. The security returns to resistance for the second time and breaks out, yielding a measured move target equal to the depth of the cup. Alan Farley is a writer and contributor for TheStreet and the editor of Hard Right Edge, one of the first stock trading websites.

To indentify peaks and troughs, we can use a smoothing function like moving average. If the price oscillated up and down a number of times within the handle, a stop-loss might also be placed below the most recent swing low. While the price is expected to rise, that doesn’t mean it will.

How To Find Undervalued Stocks

Finally, the security breaks out again, surpassing its highs that are equal to the depth of the cup’s low point. The cup and handle is considered a bullish signal, with the right-hand side of the pattern typically experiencing lower trading volume. The pattern’s formation may be as short as seven weeks or as long as 65 weeks. The price rejects forming a double top as a bull flag reversion forms the handle.

IBD Videos Get market updates, educational videos, webinars, and stock analysis. The handle should form in the upper part of the entire pattern. Greed, fear, hope, despair and other emotions drive stock prices. In the market where false signals are readily available, you can essentially use the Ichimoku Cloud to ignore signals, which lack conviction. Now, let’s revisit the same chart using the logic of selling the supply or upper resistance line on the chart. All the same concepts apply, regardless of whether the cup is “U” shaped, “V” shaped or wavy, or whether the handle is a triangle, wedge, or channel.

Channel Pattern: What Is It? How To Trade It?

Note the large bearish move on the chart following the breakdown. As we point out earlier, you would prefer to open a trade after confirming the Cup with Handle pattern. If the pattern is bullish, Swing trading the signal should be a bullish breakout through the handle. The Cup with Handle trigger signal is at the break out of the handle. The handle breakout acts as a confirmation of the pattern.

The stock then rebounds, testing the previous high resistance levels, after which it falls into a sideways trend. In the final leg of the pattern, the stock exceeds these resistance levels, soaring 50% above the previous high. The rally indicated by the cup shape shows re-investment in an asset that had become undervalued.

Chart Patterns Cup And Handle

No strategy is complete without understanding position sizing, so check out the How Much Stock to Buy article for a full explanation. The “Vs” criteria I don’t change very often, because they are relative to what the indexes or other stocks are doing. Please see the further, important disclosures about the risks and costs of trading, and client responsibilities for maintenance of an account through our firm, available on this website. Testimonials on this website may not be representative of the experience of other customers. No testimonial should be considered as a guarantee of future performance or success. Features a daily live trading broadcast, professional education and an active community.

The handle is a relatively short period of consolidation. The full pattern is complete when price breaks out of this consolidation in the direction of the cups advance. 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 cup and handle pattern occurs in both small time frames, like a one-minute chart, and in large time frames, like daily, weekly, and monthly charts.

Trading charts are a visual instrument some investors use to track the price of an asset over time, including most often stocks. There are a variety of chart types, such as the bar and candlestick charts, but they generally all share the same format. The chart displays a range of dates or times along the horizontal or X axis, and a range of prices along the vertical or Y axis.

Trading The Cup And Handle Chart Pattern

The pattern begins after a well-liked stock rallies to a new high following a positive fundamental development. As the stock surges investors feel increasingly comfortable paying higher prices but there comes a point when the “story” of the stock fails to convert new believers. Slowly, the stock begins to drift lower as those seeking to lock-in profits outnumber those intrigued by the story. An ideal trade would be to ensure a handle occurs within the upper half of the cup. An intelligent trader would place a stop-loss order in a way that it doesn’t end up in the lower half of the cup formation. For instance, let’s say a cup forms between $100 and $98.

Price action is an important and common trading strategy that traders use to identify entry and exit positions. There are several approaches to the price action strategy. Many investors that bought shares near all-time highs before the left side of the cup was formed are looking to recoup their lost money. The handle shakes out weak shareholders before the real move happens. The shakeout is healthy for the pattern because when weaker hands tend to flood a position, they are more inclined to sell as price rises or breaks out.

This may be a bullish flag or pennant pattern, or a short pullback. Ideally, the handle should retrace no more than 1/3 into the cup’s depth. The shorter the retracement in terms of both time and distance, the more bullish the pattern. Once the cup is completed, the handle will begin to develop. These trend lines should have a slight downward slant to them.

Do You Want The Best Course About Candlestick Patterns?

Some patterns emerge during day trading, forming over the course of hours, while others can take shape over the better part of a year. Often the asset’s price will remain at its low point for weeks foreign exchange market or even months before recovering its value. I cup and handle chart pattern ideally takes place early in bull markets when the stock indexes are trading over their 200-day simple moving averages.

Author: Lorie Konish