What is Cup and Handle Pattern, and How to Trade it?

What is Cup and Handle Pattern, and How to Trade it?

Typically, they’re investors who bought late, right at the end of the prior uptrend. When the stock sold off to form the left side of the chart pattern, they suffered a sharp loss. So as the stock nears that old high — and the weaker holders’ break-even points — they start to sell. Like steppingstones, leading stocks typically form multiple chart patterns as they make their big moves over several months or even years. The process we just went over of finding support, hitting resistance, and breaking out past new buys points continues to repeat.

  1. This can act as a goal or a partial price target point where some gains can be realized.
  2. You can add in lines for support or resistance, use technical indicators, easily export to review later, and so much more.
  3. The cup part of the pattern forms after a price rally and looks like a gradually rounded bottom of a bowl.
  4. For example, if the price quote for the stock is $56.25, the handle is $56, eliminating the value of cents in the quote.

The breakout comes when institutional investors start buying like there is no tomorrow. That surge of volume powers the stock to its breakout and larger gains. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. StocksToTrade in no way warrants the solvency, financial condition, or investment advisability ofany of the securities mentioned in communications or websites. In addition,StocksToTrade accepts no liability whatsoever for any direct or consequential loss arising from any useof this information. If the pattern is successful, there’s a good chance for another breakout after the stock passes the cup’s previous high.

Recognising the Cup and Handle Pattern

If institutional investors believe in future prospects of the stock, they’ll start to establish new positions or add to existing ones. Once the floor of support is established, the stock will begin to climb, forming the right side of the chart pattern. The bottom of the base forms the floor of support, which may come at a moving average like the 10-week or 50-day line. Tracking price and volume in tandem with each other gives unbiased, opinion-free insight into the behavior of the market and individual stocks.

If you’re going to use this pattern in your trading strategy, you’ll have to accept the discrepancies. The heavy support level can potentially improve the odds of the price moving higher after a breakout. The handle isn’t as pronounced as the first two, but it’s there. After the cup is completed, a trading range develops on the right side — which forms the handle. Yep, this is a bullish pattern and can be a technical indicator for traders of a potential upcoming breakout.

Handles and Foreign Exchange Markets

The last time I checked, simply drawing a line up in the air means absolutely squat. Welcome to the Free Trading Strategy Courses 2024 – the place where your trading journey could transform your life. Patient investors who bought at that buy point and held on through February 2006 fx choice review could have made a 128% gain. If they stayed put through June 2008, the gain would have been 250%. Volume soared Sept. 30, followed by the breakout in twice average volume on Oct. 2 (4). Shares pressed briefly above the proper buy point on Aug. 19 but reversed to end lower.

Price Target/exit points

A profit objective can be calculated by calculating the distance between the cup’s bottom and the pattern’s breakout level and extending that distance upward from the breakout. A profit target is set 20 points above the pattern’s handle, for instance, if there are 20 points between the cup’s bottom and the handle breakout level. Depending on the trader’s risk tolerance and market volatility, stop-loss orders may be set below the handle or the cup.

Markets

Every day we provide members with mentorship, webinars, chat, trading education, and community. It’s all so you can ask questions, get answers, and find your market groove. The round shape indicates consolidation, and that’s a good thing.

Virtual Assets are volatile, and their value may fluctuate, which can lead to potential gains
or significant losses. Returns or profits may be subject to capital gains tax in your jurisdiction, for which
you shall be entirely responsible. One of the most important chart patterns in the stock market is the Cup and Handle Pattern, invented by William O’Neill. It also holds the crowd proclaimed title as one of the most profitable and reliable breakout patterns.

In my experience, it’s also one of the more reliable chart patterns, as it takes quite some time for the formation to setup. In this article, I will cover 3 strategies for trading cup and handle patterns that you will not find anywhere else on the web. The cup and handle pattern and the inverted type are continuation patterns. Under normal conditions, they are not expected to signal trend reversals, but nothing is perfect in the market.

72.12% of retail investor accounts lose money when trading ᏟᖴᎠs with this provider. Having a lot of weak holders in a stock means that whenever the share price rises, these weak holders will sell shares, pushing the price back down. A handle is a shakeout of weaker holders — those not committed to holding the stock longer term. A sharp decline of more than 12%-15% in heavy volume could indicate a more serious sell-off, one that might prevent the stock from launching a successful move. So it’s not unusual to see growth stocks that made big gains in the prior bull market fall sharply and form long and deep bases in the bull market that follows. It is generally shorter in duration compared to the cup and can last anywhere from a few days to several weeks.

Strategy #3 – Buy on the Cross of the Cloud

By learning to recognize them in real time, traders can limit their risks by determining the best points for entry and exit. Handles that drift upward along their price lows or sideways on lows, an action called wedging, have a higher failure rate. This happens because the stock didn’t get a chance for the necessary shakeout.

This final shakeout of weak shareholders acts as a verification that selling is done and the stock is ready to advance. My top stocks to watch in January 2024 have the kind of volatility that smart traders target. 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. Cup shapes, heights, and price targets can differ greatly.

Selling possibilities are seen when a “cup and handle” is inverted, which predicts a bearish trend will soon begin. This pattern creates an “n” shape with an upward handle by moving opposite the cup and handle. Also, managing your demat account is simple and safe when using a user-friendly tool like blinkX. Investors may swiftly perform trades, manage their holdings, and dematerialise with blinkX trading app.

When the price of an asset moves in a way that resembles a typical form, such as a triangle, rectangle, head and shoulders, or in this example, a cup and handle, a chart pattern will appear. It offers a sensible entry point, a place https://forex-review.net/ to put a stop loss for risk management, and a price objective to finish a successful trade. A Cup and Handle is a chart pattern where the price movement of an asset resembles a “cup” followed by a downward trending price pattern.

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. The first is that it can take some time for the pattern to fully form, which can lead to late decisions.