Cup and Handle Pattern: Overview, How to Trade with Examples

The cup with handle pattern is the exact opposite of the inverted cup and handle pattern. By having the handle and stop-loss in the upper third (or upper half) of the cup, the stop-loss stays closer to the entry point, which helps improve the risk-reward ratio of the trade. The stop-loss represents the risk portion of the trade, while the target represents the reward portion. For example, if a cup forms between $99 and $100, the handle should form between $100 and $99.50, ideally between $100 and $99.65.

1. The distance from the top of the cup to the bottom, which is the minimum goal shown by a vertical blue line, was reached in less than a year.
2. Some of us may not be rocket scientists; however, everyone I know has used a cup in their lifetime.
3. The first cup and handle pattern trading step is to identify the pattern on a market chart by manually browsing finance charts or by using a pattern scanner.
4. Instead of the buy trigger, the failed cup and handle converts to a sell signal.
5. A stop loss is an order that automatically closes the position if the price moves against the trader.
6. A cup and handle pattern failure occurs occasionally and a trader protects against a pattern failing by setting stop losses to manage risk.

Best 3 Flag and Pennant Trading Strategies

Interestingly, the consolidation at the bottom of the cup was a double bottom pattern (purple circles). The double bottom is a bullish pattern that signals when a trend may change from down to up. Generally, a longer duration between the formation of the cup and handle increases the reliability of the pattern. This prolonged accumulation phase indicates stronger buying pressure and a greater potential for a breakout. Cup and handle patterns are generally used to identify potential entry points in bullish markets or during periods of strong upward momentum for a security.

The causes behind the cup formation involves buyers initially dominating the market, leading to price increases. As the market price begins to show signs of weakening and leveling off, a period of consolidation ensues, forming the left side of the cup. This consolidation indicates a shift from sellers to buyers, with the rounding bottom resembling the shape of a tea cup or U. For technicians, the cup and handle only provides a bullish continuation signal when the handle forms with lower volume and prices subsequently break out above the handle’s resistance. This can be done by measuring the height of the cup formation and adding it to the breakout point of the handle formation.

Enter Buy Trade After Pattern Breakout

The handle component should have a 50% maximum height of the cup component. Cup and handle patterns form on all timeframes from short term tick charts to longer timeframe yearly price charts. The Cup and Handle Pattern are used by traders to spot long-term investment opportunities in the security market. Traders use the Cup and Handle pattern when they see a stock’s price has formed a “U” shape, followed by a slight pullback forming a “handle” shape.

Traders see this as a sign to sell or go short on the asset, or to wait for a more clear trend to emerge before making any trading decisions. The cup may dominate the first half of the day, with the handle forming late in the session. When prices break upward out of the handle resistance, it triggers a buy entry for short-term traders. The target with the cup and handle pattern is the height of the cup added to the breakout point of the handle. The cup and handle is considered a bullish signal, with the right-hand side of the pattern typically experiencing lower trading volume.

Cup With Handle

1. In this article, I will cover 3 strategies for trading cup and handle patterns that you will not find anywhere else on the web.
2. These continuation patterns resemble an inverted coffee cup and are a harbinger of falling prices.
3. When price breaks out of the handle’s trading range, it signals a continuation of the prior trend.
4. The low between points 3 and 4 should be higher than the low between point 4 and the end of the handle line.
5. Traders usually bet that prices will continue to rise once they cross the resistance level.
6. Consider a scenario where a stock has recently reached a high after significant momentum but has since corrected, falling almost 50%.

The market asset price rises before a price pause and retracement and then price coils and trends higher to reach the prior price pause point. Assuming a breakout occurs at Rs. 300 per share, traders may consider entering a long position. To mitigate risk, a stop-loss order could be placed below the handle’s support level, such as Rs. 280 per share. A potential take-profit target can be determined by measuring the depth of the cup (approximately Rs. 50) and adding it to the breakout price.

A Cup With Handle pattern is a bullish continuation pattern that marks a consolidation period followed by a breakout. The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. It was developed by William O’Neil and introduced in his 1988 book How to Make Money in Stocks. Cup with handle patterns are among the most popular technical chart patterns. A cup and handle pattern is formed when there is a price rise followed by a fall. The price rallies back to the point where the fall started, which creates a “U” or cup cup and handle pattern target shape.

In the above chart example, you can see how the stock made a nice round cup and had a strong handle, before continuing higher. The one thing to point out is that on the breakout, the stock used a lot of gas just to work its way through the cloud. By the time the stock closed outside of the Ichimoku cloud, it was apparent that the stock’s tank was empty. Opponents of the V-bottom argue that prices don’t stabilize before bottoming and believe the price may drop back to test that level. But, ultimately, if the price breaks above the handle, it signals an upside move.

Managing risk is key when basing decisions on these accelerated intraday setups. While William O’Neil popularized the cup and handle in his writings, its origins remain uncertain. Traders were observing and utilizing the pattern long before O’Neil advocated its use. O’Neil also founded Investor’s Business Daily, which adopted the formation in its technical analysis offerings.

To capitalise on it, traders have to accurately identify it, time their purchase, set a stop-loss for protection, and determine the optimal moment to sell for maximum profit. The inverted cup and handle pattern is validated when the price breaks below the support level formed by the low points of the cup and handle. This breakout confirms the bearish signal, indicating a potential continuation of the downtrend.

While the traditional pattern features a “U” shape signaling a bullish continuation, the reverse pattern forms an inverted “U” shape, often resembling a double top pattern. This inverted cup suggests a bearish reversal, with the handle forming a bearish flag or bear pennant, indicating further downward momentum. As the cup forms, you typically observe a decrease in trading volume during the first half of the cup. This decline in volume indicates that the market is stabilizing after the initial price drop, with fewer participants willing to sell at lower prices. The decrease in volume during this phase is a sign that selling pressure is diminishing, and the market is beginning to find support. As the price starts to rise again, heading toward the previous high, the volume may gradually increase, but it often remains below the levels seen during the initial decline.