Cup and Handle Pattern Trading Strategy Guide

A cup and handle pattern confirmation technical indicator is the volume indicator as the volume indicator confirms whether there are large buyers behind a price breakout upward move. The cup and handle pattern trading risks are overnight price gap downs, illiquid markets, order slippage, and unexpected market news events causing increased trading losses. Cup and handle pattern risk management is set by placing a stop-loss order below the swing low candlestick price of the handle of the pattern.

Tips from the Trading Desk

Once the price is rejected at the top of the cup, it fails and forms the handle. Once the price breaks the cup’s top and holds, it’s a bullish continuation pattern. The cup and handle pattern forms in an uptrend, especially a new uptrend. It is considered a consolidation in the uptrend, and the trend is expected to continue moving upward after the consolidation when the price breaks above the resistance of the consolidation. The cup and handle pattern is a widely used pattern by conventional traders. With widespread usage, its reliability has decreased as the false signals have increased significantly.

The pattern completes when the price breaks out from the handle’s trading range to signal the continuation of the previous rally. Traders need in-depth knowledge of technical analysis to identify the demand and supply zones in the candlestick chart along with the patterns. If the knowledge of patterns is supported by in-depth technical analysis then it gets easier for traders to predict the movement of the stock. To learn about advance technical analysis, enroll in our Trading in the Zone course today and get free lifetime support too. The inverted cup and handle pattern signals the start of the downtrend.

In the final leg of the pattern, the stock exceeds these resistance levels, soaring 50% above the previous high. O’Neil included time frame measurements for each component, as well as a detailed description of the cup and handle pattern target rounded lows that give the pattern its unique teacup appearance. We will help to challenge your ideas, skills, and perceptions of the stock market. Every day people join our community and we welcome them with open arms.

Are there variations of different types of cup and handle patterns?

…Then you can consider taking only 50% of the Handle height and adding it to the breakout point. And if enough buyers are on the support level the price continues to climb higher. In such scenarios, you can open a small Long position and increase the size if the price closes above the Key Resistance Line. You can also draw curved trendlines to connect the lows of the Rounding Bottom formation (or Cup formation). Well, the Handle is the retracement itself and its shape varies in each formation (they could be like Troughs, Rectangles, or Tilted Congested Zones).

Under normal conditions, they are not expected to signal trend reversals, but nothing is perfect in the market. There can be situations where, after the formation of the handle, the price breaks below the support level formed by the bottom of the cup, invalidating the pattern. The cup and handle pattern is a formation on the price chart of an asset that resembles a cup with a handle. As its name implies, the pattern consists of two parts — the cup and the handle. Further down in the article we have several charts to show how it looks like in a chart. Once the cup pattern in the chart completes, the handle forms as the price stalls or moves downwards.

Example of Trading in Cup and Handle Pattern

However, after the period of consolidation, the stock witnessed another uptrend creating the right edge of the cup. At the high point, it achieves the price of Rs.90.5, recovering from the downtrend that started a few months prior. After the initial entry point, set stop loss orders below the last handle low or below the lower rim line to control downside risk. Then target taking partial profits once prices reach the depth of the cup projected upwards from the breakout level. Instead of a rounded bottom bracketed by lows, the inverted cup and handle pattern traces out a rounded peak bracketed by nearly equal highs.

In both patterns, the target should be the opposite of the cup range. If the cup is formed between the range of , then the uptrend target should be near to 110. Whereas in the case of the inverted cup and handle if the cup is formed between the , then the target of the downtrend should be near 80. Whereas, in the uptrend, this pattern indicates the continuation of the trend. When the Cup and Handle Pattern forms in an upward rally the price continues to go up after the breakout point. The first step toward trading the cup and handle pattern is to enter a long position.

• Twenty years of trading research show that the cup and handle pattern has a 95% success rate in bull markets and returns an average profit of +54%.
• This pattern is considered to be a bearish signal that indicates a stock may see a price decrease in the future.
• This classic chart pattern typically consists of a “cup” formation followed by a smaller “handle,” which signals a continuation of an uptrend.

Also, we provide you with free options courses that teach you how to implement our trades as well. If you do not agree with any term of provision of our Terms and Conditions, you should not use our Site, Services, Content or Information. Please be advised that your continued use of the Site, Services, Content, or Information provided shall indicate your consent and agreement to our Terms and Conditions. Options expire, and you’ll lose that investment if you don’t give yourself enough time.

Advantages of Trading on the Cup and Handle Pattern

This example is best for medium term and longer term position traders seeking to trade a cup and handle. Thirdly, plot the pattern’s resistance level component which involves drawing a resistance trendline from left to right connecting the swing high price peaks together. A minimum of three swing high peaks are needed to draw the resistance line correctly. Fourthly, the pattern price breakout formation involves the price rising through the resistance area and continuing to increase higher.

Is a cup & handle pattern bullish or bearish?

Secondly, plot the handle component which involves drawing a smaller rounded U shape from left to right that connects the swing low prices together. To qualify as a cup and handle pattern, the retracement of the cup should be 1/3 or less of the previous advance. The handle should have a retracement of 1/3 or less of the cup’s advance and should complete within 1-4 weeks. The next time you come across a potential cup and handle pattern, use our simple 10-step checklist above to verify the pattern is valid (be sure to bookmark this page for easy reference).

What Type Of Price Charts Do Cup and Handles Form On?

• The cup and handle pattern gets its name because it looks exactly like that.
• At its lowest point, stock A retraces its previous gains and reaches a price of Rs.85.
• After a cup and handle pattern forms, the price should see a sharp increase in the short- to medium-term.
• The rounding bottom of the cup is significant, showing a consolidation period where market sentiment shifts from bearish to bullish.

If it’s money and wealth for material things, money to travel and build memories, or paying for your child’s education, it’s all good. We know that you’ll walk away from a stronger, more confident, and street-wise trader. What we really care about is helping you, and seeing you succeed as a trader. We want the everyday person to get the kind of training in the stock market we would have wanted when we started out.

This distance will equal the future price target, which you should annotate in the breakout direction on the chart. The cup and handle pattern traders are scalpers, day traders, swing traders, position traders, professional chartered technical analysts, and active investors. A cup and handle pattern is identified by its shape which starts with a U shape bottom which is the cup component of the pattern. This “U” shape bottom takes a period of time to form and it should not resemble a sharp “V” shape as a V shape indicates the cup comnponent formed too fast.

The cup and handle pattern appears on weekly and daily price charts and is observed across all financial markets including stocks, ETFs, indices, forex, and commodities. Traders can set stop-loss orders when trading the cup and handle pattern by first identifying the pattern’s key features. This classic chart pattern typically consists of a “cup” formation followed by a smaller “handle,” which signals a continuation of an uptrend.