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How to Trade Cup and Handle Pattern: Examples, Limitations

Cup and Handle Pattern

Additionally, they pay close attention to trading volume during the breakout. The first step toward trading the https://www.bigshotrading.info/blog/cup-and-handle-pattern/ is to enter a long position. One should enter the trade by examining the point at which the breakout happens, that is, the price crosses the channel or triangle pattern of the handle. At this moment, the pattern is complete, with an expectation that the price will rise.

The formation of the cup should be followed by dropping volumes. And when the handle pattern forms, the volume should go even lower before pushing out or surging to validate the price breakout. This is the exact turning point; you can validate the same by pulling out the volume chart. For a successful and clear cup and handle formation, the volume will start to be more buyer-friendly at this point. The anatomy of a cup and handle formation is crucial as it allows you to identify the chart formation and plan a trading strategy accordingly.

Avoid Deep Bases

William O’Neil found 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%. Another mistake traders make is not managing their risk properly. Because the cup and handle pattern is considered a reliable signal, traders may tend to forget that they can (and will) at times fail. 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. Here is ETH’s chart from late 2020, with the $483 level acting as a strong resistance for the drawn cup and handle pattern.

Cup and Handle Pattern

The best way to locate this is to identify the last instance of an uptrend and see how much the price moved — from a previous low to the start of the left side of the cup. Consider this move as the benchmark and see to it that the depth is less than 50% of the same. A profit target is determined by measuring the distance between the bottom of the cup and the pattern’s breakout level and extending that distance upward from the breakout. For example, if the distance between the bottom of the cup and handle breakout level is 20 points, a profit target is placed 20 points above the pattern’s handle.

Anatomy of the cup and handle pattern

The cup-and-handle is defined by the short-term dip in an otherwise long-term pattern of growth. The standard cup and handle pattern is a bullish signal, but there is also a bearish version of this pattern called “Inverse Cup and Handle” pattern. However, note that cup and handle pattern failure may occur more frequently in overall bearish markets. Always use stops to minimize risk in case of a failed cup and handle pattern. Finally, when the price breaks out of Resistance, the cup and handle pattern is “confirmed”, and the market could move higher. The stock needs to show a 30% uptrend from any price point, but it must be before the base’s construction.

To improve the odds of the pattern resulting in an actual 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. If a cup and handle forms and it is confirmed, the price should see a sharp increase in the short- to medium-term. As a result of this behavior, investors generally see the handle as the place in which to buy. A stock’s price will dip while it is in the handle, but in a true cup-and-handle pattern this dip will not endure. It typically represents technical analysis rather than a shift in the stock’s fundamental value.

Timeframes

For traders, chart patterns are critical technical indicators that can help them predict price movements. The https://www.bigshotrading.info/ is one of the most popular forms of technical analysis that signifies a bullish trend. The pattern comprises the cup and the handle and resembles them in appearance. The cup and handle breakout point is when the pattern is complete, and traders can expect a continuation of the price uptrend. For the novice and the experienced trader, this chart pattern can help determine points of entry and exit in a trade.

  • If you’re thinking about trading stocks, it’s important to learn as much as you can about how the market works and all of the different patterns that traders look for.
  • It’s the starting point for scoring runs and winning the investing game.
  • A value above 80 indicates that it is overbought, while one below 20 shows oversold conditions.
  • The pattern takes some time to develop, but is relatively straightforward to recognize and trade on once it forms.
  • In the cup and handle pattern, as the stock price moves upwards, there is selling pressure among investors who want to consolidate their profits at new highs.
  • Stock moving averages can be calculated across a wide range of intervals, making them applicable to both long and short-term investment strategies.
  • At that point, it makes sense to exit the stock, even if the 7%-8% loss-cutting sell rule has not yet been triggered.
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