The Cup And Handle Pattern Works

The price action still demonstrates bearish activity on the chart. Therefore, we decide to hold the bearish trade for additional profits. We draw a bearish trend line on the chart in order to better define the slope of the downtrend. See that the price continues the bullish trend afterwards. About 20 minutes after we buy MSFT, the price action has already reached the minimum target of the pattern. The tops and the bottoms of the price action are increasing as well.

Figure 9 and Figure 10 show the cup-and-handle pattern for LCOS. In Figure 10, the stock tries to breakout on 2/17 at $43.75, but reverses and closes down that day at $41.63. After a couple more aborted attempts, the price finally clears and holds above $43.75 on 3/9, with sufficient volume to meet the buy criterion.

  • If you trade a bearish Cup with Handle your stop loss order should be placed above the upper level of the handle.
  • The bottom of the cup and handle pattern will dip about 15% to 50% from the peak.
  • The stock or other security shows a significant high and makes an uptrend that has heightened in the last one to three months.
  • Watch our video on how to identify and trade inverted cup and handle patterns.
  • One of the advanced techniques for trading the cup breakout system is to include market internals in your analysis.
  • This happens when traders and investors stop selling shares and shift back into buying mode.

A database of 10,139 stocks was screened on February 10 of 1998, and fourteen stocks were selected by the algorithm. Experience had shown that stocks COCACOLA stock price with Gamma’s exceeding 3.5 were the best candidates for breakout. Ten stocks of the fourteen had Gamma’s exceeding 3.5, and are shown in Table 2 .

The pattern’s formation may be as short as seven weeks or as long as 65 weeks. Like most technical patterns, the cup with handle pattern is really little more than a variation of another technical 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.

Now that we have a better understanding of the structure of the pattern, we are going to summarize some trade management ideas around this pattern. Let’s take a look at Long (finance) a potential Cup and Handle trading system and the rules we need to follow when trading this pattern. Then comes the handle, which is expressed by a bearish price move.

Introduction To Price Chart Patterns

Most times, the handle should not go lower than the top third of the cup for it to be considered a cup and handle pattern. A cup and handle chart may indicate either a continuation pattern or a reversal pattern. A reversal pattern can be seen when the price is in a long-term downtrend, then forms a cup and handle that reverses the trend as the price begins to rise. A continuation pattern on the other hand occurs when there’s an uptrend; the price rises and forms a cup and handle, and then continues to rise.

That’s why we designed StocksToTrade to have such incredible, easy-to-customize charts. You can add in lines for support or resistance, use technical indicators, easily export to review later, and so much more. I often tell new traders to study charts until their eyes bleed. That’s a bit of an exaggeration, but I want every trader to understand how much a chart can tell you.

In the reversal cup and handle, prices start off in a prolonged downtrend, where they gradually lose momentum and become more sideways. Prices start to bottom out and form a reversal base, before leading to a change in direction. The cup and handle is an accumulation buying pattern, which is found during long periods of consolidation, and can lead to powerful explosive moves once the pattern is fully completed. Once this happens, the the cup advances and forms a U, and the price drifts downward slightly forming the handle.

Entering A Cup And Handle Trade

Big caps sometimes can break out successfully with smaller volume surges. Even if all other parameters come together, you should avoid stocks that break out below their 10-week moving average. A loose, choppy base shows the stock needs to cup with handle chart pattern go far for price discovery. If institutions are holding on to the stock, it won’t fall too far. The cup should form smoothly, without major price declines on the left side. Sharp gains on the right side aren’t necessarily good, either.

The subsequent decline ended within two points of theinitial public offering price, far exceeding O’Neil’s requirement for a shallow cup high in the prior trend. The subsequent recovery wave reached the prior high in 2011, nearly 10 years after the first print. The handle follows the classic pullback expectation, finding support at the 50% retracement in a rounded shape, and returns to the high for a second time 14 months later. The stock broke out in October 2013 and added 90 points in the following five months. A cup and handle is a technical chart pattern that resembles a cup and handle where the cup is in the shape of a “u” and the handle has a slight downward drift. The technical target for a cup with handle pattern is derived by adding the height of the “cup” portion of the pattern to the eventual breakout from the “handle” portion of the pattern. The cup and handle pattern is called this way because it resembles a true cup and handle where the cup is in the shape of a letter “U” and the handle has a slight downward drift.

They’re great to spot on daily chart time frames because the chart pattern can take a month up to 6 months to form. The handle itself takes one week up to 4 weeks to form. Wait for confirmation of a direction after the handle breaks. Sometimes the stock will move back to test the new resistance level the handle forms to see if it’ll hold. You want to get a good entry especially if you’re using day trading strategies that work. Inverted head and shoulders patterns are common patterns found on charts. There can be a smaller inverse cup and handle inside a large cup and handle.

Develop Your Trading Skills

Inverted cup and handle patterns are the inverse of their counterpart the cup and handle. The rounded bottom is up top and as price falls down to the base of the cup, it then gets a pop and retracement, which forms the handle. Watch our video on how to identify and trade inverted cup and handle patterns. The cup and handle chart pattern does have a few limitations. Firstly, it does not occur within a specific timeframe. Sometimes it forms within a few days, but it can take up to a year for the pattern to fully form.

cup with handle chart pattern

From May to June, ALTR consolidated, in an approximate $3 range between $21.97 and $24.91. The stock’s May 24 low of $21.97 marked the dip, or bottom of the cup. note the gentle “U” shape that forms from this trading activity.

What Is An Inverted Cup And Handle?

The handle should form in the upper part of the entire pattern. The cup with handle must be at least seven weeks long. If there is no handle, then the cup itself must stretch a minimum six weeks. You need to know if that cup with handle is as it should be, or if it has flaws. Greed, fear, hope, despair and other emotions drive stock prices. cup with handle chart pattern A head and shoulders pattern is a bearish indicator that appears on a chart as a set of 3 troughs and peaks, with the center peak a head above 2 shoulders. A breakout trader looks for levels that a security hasn’t been able to move beyond, and waits for it to move beyond those levels, as it could keep moving in that direction.

cup with handle chart pattern

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 or even months before recovering its value. This is useful when trading both the cup and handle and the inverted cup and handle, because you can speculate on upward or downward price movements. Once the price has reached the top of the cup, it starts moving sideways or slightly downwards to form the handle. If the handle drops below the lower half of the cup, it is no longer a ‘cup and handle’ pattern. In most cases, the handle should not dip below the top third of the cup for it to be a cup and handle pattern.

Whatever the height of the cup is, add that height to the breakout point of the handle. For example, if the cup forms between $100 and $99, and the breakout point is $100, the target is $101.

Like all technical indicators, the cup and handle should be used in concert with other signals and indicators before making a trading decision. Specifically with the cup and handle, certain limitations have been identified by practitioners.

cup with handle chart pattern

Because the inverted cup and handle is a bearish pattern, the stock would break down out of the handle.Cup and handle patterns break down all the time. The profitable Cup and Handle trading strategy might be a humorous name. But the cup and handle pattern has a long history and was discovered by the famous trader, William J. O’Neil.

Past performance in the market is not indicative of future results. The Cup and Handle is a bullish reversal pattern that signals to traders the markets are looking to move higher. Finally, once price trades above the upper resistance formed by the Handle, the pattern is “confirmed” and the market is now going to continue heading higher. Next, the price action is weak at the resistance caused by the cup and forces the price of the stock to go sideways or downward. The cup and handle pattern target equals the size of the pattern itself. Now that we are in a short trade based on the bearish cup and handle, we need to measure the size of the pattern. Well, the Inverted cup and handle starts with a bearish price run which grows into a consolidation with an inverted “U” shape.