How to trade The Cup and Handle Chart Pattern

Second, the security will retrace, dropping no more than 50% of the previous high creating a rounding bottom. Third, the security will rebound to its previous high, but subsequently decline, forming the “handle” part of the formation. Finally, the security breaks out again, surpassing its highs that are equal to the depth of the cup’s low point. A cup and handle is a technical analysis pattern that appears on a chart as a U-shaped pattern, followed by a small downward drift, resembling a handle.

We explore the cup and handle pattern, as well as the inverted cup and handle, and show you how to trade when you recognise these patterns. You need a stop-loss order to get you out of the trade if after buying the breakout, the price drops, instead of rising. Your stop loss should be at a level that invalidates the pattern’s signal, and that level is below the lowest point of the handle. After a cup and handle pattern forms, the price should see a sharp increase in the short- to medium-term.

Cup With Handle

This time, the cup prints a V-shape rather than a rounded bottom, with price stalling under the prior high. It ground sideways in a broadening formation (second blue box) that looks nothing like the classic handle for another three weeks and what does a cup and handle chart mean broke out. This rally failed to reach the measured move target at 50, calculated by adding the four-point depth of the cup to the resistance line near $46. The cup and handle chart patterns triggers a signal when it breaks out of the handle.

Let’s consider the market mechanics of a typical cup and handle scenario. A new rally prints 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.

Cup and Handle Pattern: How to Trade and Target with an Example

Note that a deeper handle retracement, rounded or otherwise, lowers the odds for a breakout because the price structure reinforces resistance at the prior high. 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. First, longs entering deep in the pattern get nervous because they were betting on a breakout that fails. At the same time, longs chasing the breakout watch a small profit evaporate and are forced to defend positions. Both groups are now targeted for losses or reduced profits, while short-sellers pat themselves on the back for a job well done.

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• As the cup is completed, a trading range develops on the right-hand side, and the handle is formed.
• The handle mostly represents a small slip showing a rally on the chart.
• The cup and handle is one of many chart patterns that traders can use to guide their strategy.
• In the above chart, we have a bearish cup and handle chart pattern.

Sometimes it forms within a few days, but it can take up to a year for the pattern to fully form. Secondly, you need to learn to identify the length and depth of a true cup and handle, as there can be false signals. Lastly, illiquidity also restricts the cup and handle from fully forming as trading volume also affects an asset’s price. The cup and handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. It is considered a signal of an uptrend in the stock market and is used to discover opportunities to go long. Another related technical analysis indicator to keep in mind is an inverted cup and handle pattern.

New Ways to Trade the Cup and Handle Pattern

Indicators are calculations that attempt to measure a security’s underlying trend, momentum, or volatility. Chart patterns are formations that appear on a stock’s price chart and often repeat themselves. Volume is the number of shares that change hands each day and can be used to confirm breakouts and trends. To identify the cup and handle pattern, start by following the price movements on a chart. The pattern starts to form when there is a sharp downward price movement over a short time.

• It works by exiting a trade if the price action begins to go against you.
• It helps improve the odds of the price moving higher after the breakout.
• If the cup is in a V-shape, the reversal will be too sharp of a movement.
• For this trade, a profit target will be determined by measuring the vertical distance between the bottom of the cup and the resistance trend line, connecting two highs of the cup.
• Eventually, the stock finds a floor of support for weeks or longer before climbing again.

For example, if the cup forms between $100 and $99 and the breakout point is $100, the target is $101. A good time to buy is when the price of the asset moves up and exceeds the price levels seen previously at the top of the right side of the cup. That means the asset’s price, which is trending lower to form the handle, should not drop to level of the lower half of the cup.

Named for its distinctive shape, the cup and handle pattern is a powerful, bullish signal that can indicate a stock or crypto is likely to see a price increase in the future. This top chart pattern is a favorite among https://www.bigshotrading.info/ swing traders, who have been relying on this pattern for decades to spot potential opportunities for profit. The classic cup and handle pattern is bullish, i.e. there is an attempt to go long on an upward breakout.

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