Cup And Handle Formation

The cup and handle pattern is an extremely valuable pattern that is easy to recognize once familiar with it. With proper planning of entry points, profit targets, and stop losses, a cup and handle pattern represents an excellent risk to reward ratio for smart traders. Even when a cup and handle pattern appears to have definitively formed, there is no guarantee that the handle will end in a breakout as expected. Therefore, it is extremely important to place stop losses to protect an investment placed on the handle’s downtrend.

The 1975 to 1978 cup and handle pattern was so strong that Gold exploded higher before forming any handle. However, as we’ve learned, perfection rarely happens in patterns. If it formed a V it would be considered too sharp for a reversal. The softer the U shape of the cup, the more it ensures the cup is the consolidation pattern. A chart pattern is a graphical presentation of price movement by using a series of trend lines or…

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If you have to argue your way into believing the shape is a cup, it’s not a cup. Let’s examine the conditions for the emergence of this candlestick analysis pattern, the way to use it in trade and some features. A price target could be between 20%-30% but they can go higher and of course they can also fall back in price and fail which is why a stop loss is always important.

The cup can develop over a period of one to six months on daily charts, or even longer on weekly charts. Ideally, the highs on the left and right side of the cup are at roughly the same price level, corresponding to a single resistance level. The cup and handle pattern is a bullish continuation pattern that consists of two parts, the cup and the handle. The cup typically takes shape as a pull back and subsequent rise, with the candlesticks in the center of the cup giving it the form of a rounded bottom. The handle is made up of downward-sloping price action that soon breaks out above the upper resistance line to indicate the continuation of the original bullish trend.

cup with handle formation

We have discussed many different types of chart patterns to date. Today we will talk about a somewhat lesser known pattern but one that is still highly effective. I am referring to the Cup and Handle Pattern for Forex trading.

Visually, the handle starts where the right side of the cup ends. An indispensable condition is the correction depth which is less than 50% of the right wall of the cup. Any retracement more than 50% invalidates the cup and handle formation.

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Any who, as the price approaches the creek or top of resistance, the stock will have a minor pullback, thus creating the handle. Once this pullback or handle is complete, we are off to the races. An example of a cup and handle is seen on the chart of Microsoft. This is seen with a second price signal, such as a candlestick. It can also come in the form of a volume spike; a change in momentum also confirms a signal. Handles are relevant to all financial markets, but mean different things depending on the asset.

This article considers why a cup with handle forms, the desirable features of the pattern and how we select them. We will also look at an example of one of the best performing cup-with-handle formations recently. Futures and forex trading Credit default swap contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style.

Cup depth should retrace about one-third of the previous advance, at the most. Strong signals are not rare, but often difficult to identify. A subtle development can signal the best timing for an advantageous options trade. No amount of analysis can make up for years of experience combined with advanced training.

cup with handle formation

In this phase the asset’s price will often decrease by a limited amount, but no more than a third of the cup’s earlier decline. If the second decrease resembles the first set of losses this is not a cup-and-handle and may represent a long-term decline in value. Check out this step-by-step guide to learn how to find the best opportunities every single day. Follow this step-by-step guide to learn how to scan for hot stocks on the move. 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 any case, the handle should retrace less than 1/3 to 1/2 the depth of the cup – the shallower the retracement, the more bullish the movement following a breakout should be. The handle can develop over one week to several months on a daily chart, although ideally completes in less than one month. Knowing how to read and interpret charts is one of the most important aspects of trading. 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. A cup and handle pattern occurs when the underlying asset forms a chart that resembles a cup in the shape of a U, and a handle represented by a slight downward trend after the cup.

If you look at the regular cup and handle pattern, there is a distinct ‘u’ shape and downward handle, which is followed by a bullish continuation. This means the inverted cup and handle is the opposite of the regular cup and handle. Instead of a ‘u’ shape, it forms an ‘n’ shape, with the handle bending slightly upwards on the chart. Other characteristics cup and handle chart pattern of the pattern that have to do with its shape are also important. For instance, the cup should be round rather V-shaped, as the former indicates consolidation whereas the latter is too sharp of a reversal from the high. The cup also should be relatively shallow – it should retrace only one-third to one-half of the prior uptrend.

Entering A Cup And Handle Trade

Now, let’s revisit the same chart using the logic of selling the supply or upper resistance line on the chart. On a 5-minute time frame, the handle is made up of at least 4 candlesticks but no more than 10. The reason I like to time box the handle, is because I want to avoid the scenario of being trapped in a sideways conundrum. Then, watch if price can break the top of the cup and hold. Whether bullish candlesticks, bearish candlesticks or doji candlesticks each one tells a story.

  • 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.
  • The change in the move is so gradual that the price action creates a rounded bottom on the chart.
  • Second, the security will retrace, dropping no more than 50% of the previous high creating a rounding bottom.
  • Draw the extension tool from the cup low to the high on the right of the cup, and then connect it down to the handle low.

The Cup and Handle pattern target maximizes the potential profit and it gives us the chance to capture the entire trend. The next logical thing we need to establish for the Cup and Handle trading strategy is where to take profits. The strength and the longevity of the prevailing trend is important as it will determine the success of the trade. How deep the rounded bottom goes will also influence our potential profit.

The handle should last no longer than one quarter of or one-third of the cup’s duration, and it should not retrace more than 38% of the move from the bottom of the cup to the top. This indicator has one input, SENSITIV, which controls the sensitivity of the indicator. Lower values mean greater sensitivity, i.e. more signals, and higher values mean less sensitivity.

Cup And Handle Patterns In Stocks

Set the stop loss just below the lowest point on the handle, but no lower than half the depth of the cup since the handle should remain above this level. Ideally, the stop loss should be within the upper third of Currency Pair the cup since strong handles will not drop below this point. The best place to enter a cup and handle pattern to maximize the likelihood of predicting the breakout while minimizing risk is during the handle.

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Prior to the decline that started the cup and handle pattern, the price had advanced about 30% over several months. The upward momentum carried through following the cup and handle. As mentioned, we may see triangles, or we may also see trading ranges or channels. Below is an example of a EUR/USD cup and handle daily chart, where the handle represents a channel or trading range angled down. After the high forms on the right side of the cup, there is a pullback that forms the handle.

Example Of How To Use The Cup And Handle

If you’re day trading and the target is not reached by the end of the day, close the position before the market closes for the day. A trailing stop-loss may also be used to get out of a position that moves close to the target but then starts to drop again. 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. Make sure you also don’t miss our amazing Triple Top Chart Pattern Trading Strategy which is the ultimate reversal trading strategy that you can have in your trading arsenal.

You are responsible for your own investment decisions. James Chen, CMT is an expert trader, investment adviser, and global market strategist. The ideal profit target for the Cup and Handle trading strategy would be equal to the same distance in price as measured from the initial Cup peak to the bottom of the Cup. A cup-with-handle base usually corrects 20% to 30% from the base’s left-side high, or 1-1/2 to two times the market average.

Author: Lisa Rowan

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