Cup And Handle Trading Guide

Some of us may not be rocket scientists; however, everyone I know has used a cup in their lifetime. Another issue has to do with the depth of the cup part of the formation. Sometimes a shallower cup can be a signal, while other times a deep cup can produce a false signal. Finally, one limitation shared across many technical patterns is that it can be unreliable in illiquid stocks.

• The cup is a U shape, with the bottom of the cup having a rounded bottom and a handle that forms to the right in a slightly downward direction.
• Often, this is simply a mirror of the distance between the low point of the cup to the breakout level.
• In my opinion, the cup and handle pattern can be both a continuation pattern and a reversal pattern.
• Many cup and handle traders adhere strictly to O’Neil’s rules for construction, but there are many variations that produce reliable results.
• The upward momentum carried through following the cup and handle.
• Sharp gains on the right side aren’t necessarily good, either.

The cup component forms as a result of the buying power drying out. It doesn’t necessarily mean that sellers are stepping in either, or even if they do they lack the power to change the trend. The bottom of the pattern will dip about 15% to 50% from the peak. If you drop lower than 50% from the peak the pattern is invalidated . Our team at Trading Strategy Guides is working hard to develop the most comprehensive guide on different chart pattern strategies. In order to understand the psychology of a chart pattern, please start here, Chart Pattern Trading Strategy step-by-step Guide.

The entry point for a cup and handle pattern is to buy when the price moves above the handle formation. This is made simpler by using a drawing tool and waiting for the price to move up and out of the drawn handle pattern. A stop-loss http://photoshootlocationlosangeles.com/what-is-swing-trading/ can be placed below the low price point in the handle. The Big Tech share basket chart provides an example of this. Prior to the decline that started the cup and handle pattern, the price had advanced about 30% over several months.

Example Of How To Use The Cup And Handle

First, there are times when the handle portion of the pattern develops above the old high. This is considered the “high handle.” Secondly, since the market is fractal, these patterns will form on a variety of charting time frames, including intraday charts. It is however advisable to remain in the trade as long as the price is trending favorably. You may not want to completely exit the trade, where the price move is having more potential to increase the profit of your trade. Therefore, you can observe clues in price action so as to increase the profits of the trade. William O’Neil created this pattern and introduced it in his book, How to Make Money in Stocks, in 1988.

If you want to have a much higher risk to reward ratio you can put the stop loss below the bottom of the handle. This will increase your profits but also decrease your winning percentage. The next logical thing we need to establish for the Cup and Handle trading strategy is where to take profits. Next, we need to figure out an entry technique, which brings Major World Indices us to the next step of the Cup and Handle trading strategy. Now we move to the second component of the Cup and Handle pattern and the second step of the Cup and Handle trading strategy. Now that we know what is Cup and Handle, let’s walk through the trading rules of the Cup and Handle trading strategy that can set you apart from the rest of the crowd.

If you’re entering on the 5-minute timeframe, then a factor of 6 would be, 5 multiply by 6, which gives you the 30-minute timeframe. If you’re long, you want to exit your trades before the swing high or Resistance. And usually, you exit your trades just before the opposing pressure steps in. With this in mind, you can trail your stop loss on the previous swing low because if the market wants to continue higher, the previous swing low shouldn’t be “broken”. For a trend to continue higher, it MUST make higher highs and lows.

Volume On The Breakout

RHI didn’t have enough gas in the tank and fell back into the cloud. Nevertheless, notice how once the handle completed and the stock sky rocketed off, the area around the cloud acted as support prior to the move up. Consider a scenario where a stock has recently reached a high after significant momentum but has since corrected, falling almost 50%. At this point, an investor may purchase the stock, anticipating that it will bounce back to previous levels. The stock then rebounds, testing the previous high resistance levels, after which it falls into a sideways trend. In the final leg of the pattern, the stock exceeds these resistance levels, soaring 50% above the previous high.

With this chart pattern, the handle has to be smaller than the cup. It should not drop into the lower half of the cup; it should stay in the upper third. The range of results in these three studies exemplify the challenge of determining a definitive success rate for day traders. At a minimum, these studies indicate at least 50% of aspiring day traders will not be profitable.

Structurally, during the construction of the Cup and Handle Pattern, the Handle must occur within the upper half of the Cup regardless of the Cup’s shape. Therefore, you can find the price level that is halfway between the highest and the lowest point of the Cup and set this price point as your Stop Loss. Contrarily, a shorter Handle with a smaller slope is a good indicator that the price will revert, and the breakout will be very bullish. Following this, the price of the security starts to rise again. Geometrically speaking, this upward slope of the price move is symmetrical and roughly a mirror image to the downward price slope during the initial phase of pattern development.

The founder of the term, William O’Neil, identified four primary stages of this technical trading pattern. First, approximately one to three months before the “cup” pattern begins, a security will reach a new high in an uptrend. Second, Balance of trade the security will retrace, dropping no more than 50% of the previous high creating a rounding bottom. Third, the security will rebound to its previous high, but subsequently decline, forming the “handle” part of the formation.

Patterns To Avoid:

The cup and handle pattern is a bullish continuation pattern. That means it’ll ultimately culminate in an upward-trending breakout. It’s important for traders to understand the psychology and market action that contributes to its formation, and there are several phases to consider. The upward momentum carried through following the cup and handle.

No strategy is complete without understanding position sizing, so check out the How Much Stock to Buy cup and handle pattern article for a full explanation. The limit portion controls the price paid in case there is gap higher or very little volume until a much higher price. The most critical factors of cup and handle patterns deal with entering and exiting them at the right time .

It typically represents technical analysis rather than a shift in the stock’s fundamental value. As a result, once this post-recovery trading has finished an investor can expect the stock to resume its previous growth. In the continuation cup and handle, prices are on an existing uptrend, and when the trend loses some steam or takes a pause, prices start to move sideways. The cup and handle pattern helps to buy up more buying pressure, before prices break to new highs and resume the uptrend.

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. 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. 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 the cup since strong handles will not drop below this point.

The Cup And Handle Is A Bullish Continuation Pattern

The stock broke out in October 2013 and added 90 points in the following five months. A V-bottom, where the price drops and then sharply rallies, may also form a cup. A half-cup is when the handle occurs in the upper half of the cup but below the prior high. But the point is that you need to define exactly how the handle will look, and at what point you will trade it. The price can be quite choppy while forming a handle, so if you don’t have precise rules, you will have more losing trades. The cup-without-handle — also called a cup-shaped base or simply a cup — is a variation on the cup-with-handle pattern.

Swing Trading Q&a

Once the breakout happens, the price and volume is expected to surge, which would make it more challenging to enter a position, hence it is recommend to take a position before that. Looking at the diagram above, you might think that the best place to enter a trade is during the cup phase, because you can get the best entry price. By this time, the bulls have the upper hand as they have been accumulating positions during the cup formation, which in turn attracts more buyers. The confirmation will come from the “handle” part of the price pattern, which is like a small pullback before the price explodes upwards.

The examples below will help clear out any questions you may have related to trading the Cup and Handle pattern in Forex. If you trade a bullish Cup with Handle pattern, you should place your stop loss order below the lower level of the handle. If you trade a bearish Cup with Handle your stop loss order should be placed new york stock exchange above the upper level of the handle. The bearish Cup & Handle starts with a bullish price move, which gradually slows down and turns into a bearish move. As we said, the classic cup and handle pattern has its bearish equivalent – the bearish Cup & Handle, which is a mirror image of the standard Cup & Handle.

Prevail and the price turns upward to form the right side of the cup. The trendline “B” shows the general increase cup with a handle strategy in volume during the final portion of the cup. It is during the formation of the handle that volume is key.

Cup and handle patterns were first identified by William J O’Neil in his book How To Make Money In Stocks. The cup and handle is a longer term continuation pattern, normally observed on weekly charts. Like any form of pattern and technical analysis, there are times when this predictor works well and other times when the forecast does not work out. There are situations when the reliability of the cup and handle pattern is diminished. Once the cup is completed, the handle will begin to develop. These trend lines should have a slight downward slant to them.

Author: Martin Essex