Cup And Handle Investing


If the pattern fails, this bull run would not be observed. 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. We’ll use a 20-period exponential moving average (EMA-20). When you plot it on a chart, this EMA acts as a dynamic support and resistance level. If you’re trading the inverted cup and handle chart pattern, your best bet is on the downside. The pattern is complete when the price breaks below the support line.

price action

If you search for the most popular charting patterns, you will find that the cup and handle pattern is right at the top of the list. One of the comments from yesterday’s « After Hours » article was a question about the identification and validity of a pattern. I felt that the reader was correct in identifying this pattern and warranted an explanation of how to incorporate this pattern into the current price action in gold. The uptrend is broken when buyers are unable to make a new high, and the price breaks below the previous low.

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We do not allow any sharing of private or pe contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account. The right side of the cup is higher than the left, and the handle consolidation has retraced only 38% of the preceding advance (ex 2% of the time).

Once the starts forming a handle we wait for a consolidation . Ideally, volume also contracts/drops during the consolidation. We then trade a breakout of the consolidation with a stop loss below the consolidation low . To use the cup-and-handle pattern successfully, investors must wait for the handle to form.

  • Cup and handle chart patterns can last anywhere from seven to 65 weeks.
  • The pattern starts to form when there is a sharp downward price movement over a short time.
  • For example, if the S&P 500 is up 3% in the last 6 months, look for stocks that are up 6%+ over the same time frame.
  • In this post, we’ll examine stocks with cup and handle patterns, how to recognize them, and what buy point will reap the most rewards.

“Your stop loss should be placed at a level where if the market reaches it, your trading setup is invalidated”. The last thing you want to do is short the market because it’s likely to breakout higher. Because this is a sign of strength telling you there are buyers willing to buy at these higher prices. To form the handle, the price must approach Resistance and form a tight consolidation . We always recommend you to backtest first the pattern and trade it a few times on a demo until you’re comfortable and have a good understanding of how to trade this setup. The best location for stop loss is below the rounded bottom, this will give you a 1 to 1 risk to reward ratio.

Don’t make this common MISTAKE when trading the Cup and Handle pattern…

Alternative purchased on the Public platform are not held in an Open to the Public Investing brokerage account and are self-custodied by the purchaser. The issuers of these securities may be an affiliate of Public, and Public may earn fees when you purchase or sell Alternative Assets. For more information on risks and conflicts of interest, see these disclosures. As you might expect from the name, the cup and handle chart is a technical indicator that looks like a cup with a handle. 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.

support and resistance

The key to buying shares is to get in at a point at which you’re confident the company’s here to stay. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. The cup-and-handle pattern is just one of these and should not be used in isolation.

The buy point occurs when the stock breaks out or moves upward through the old point of resistance . 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. Technical traders using this indicator should place a stop buy order slightly above the upper trendline of the handle part of the pattern. You can look for divergence between the SO and the price action. Divergence occurs when prices move in a certain direction, but the oscillator is moving in the opposite direction.

What if there was another way to set your target, which can account for the specific pattern you are trading? To simply apply the same price target logic to every stock formation in the market sounds a bit off, when you think about it. When you are day trading cup and handle patterns, you must realize that not all handles are created equally. The funny thing about the formation is that while the handle is the smallest portion of the pattern, it is actually the most important. Sugar also got hit by the bear market, producing meaningful corrections during the downtrend. The daily chart below shows the inverted cup and handle that has formed for over two months, culminating in a breakout.

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But before we get into what is a cup and handle pattern and understand how to interpret it, let’s look at how the pattern looks like with the help of a real tea cup. DXY upward movement continues In the cup handle formation, the targets are determined according to the fibonacci. The initial uptrend — the one that precedes the formation of the cup — should be at least a few months old. If it is, there’s far less of a chance of the pattern persisting. Short-selling investors feel they’ve already cashed in as much as they can, while long-term investors feel more confident and wait out the sell-off.

The final sell-entry (see sell #2) would be at the breakout of the cup’s lows, as seen in the chart above. You may also set a stop loss right above the down boundary of the inverted cup and handle. There’s nothing mystic around technical analysis – the chart patterns repeat due to the same psychological tendencies that people have had.

Volume — as prices decline, the volume should decrease and stay low at the base of the cup until the stock rises and goes back to the previous high point. A cup and handle technical pattern looks like a teacup with a handle with the cup in the shape of the U and the handle extending in a downward direction on the right side. One of the simplest strategies is to wait for the cup to form and use its price data to set entry, exit and stop-loss points for the handle.

This decline also takes place during a shorter time, so when it’s viewed at a distance, the pattern looks like a cup handle. Stock chart patterns are extremely helpful in finding that point. Experts have named a few of these patterns as being especially beneficial for investors, such as pennants, triangles, and heads and shoulders.

What does a bullish market mean?

Ideally, it should be in the upper third of the cup pattern. Traders use this indicator to find opportunities to buy securities with the expectation that their price will increase. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.

A cup-and-handle pattern can take place over any period of time. 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. The security finally broke out in July 2014, with the uptrend matching the length of the cup in a perfect measured move. The rally peak established a new high that yielded a pullback retracing 50% of the prior rally, nearly identical to the prior pattern.

A bullish continuation indicates that the uptrend is going to sustain in the future. So, a continuation pattern would occur in the middle of an uptrend and signal that once the pattern is complete and once you receive a confirmation, the uptrend will resume. Let’s take a closer look at the elements and discuss which tea cup trading patterns are legitimate opportunities (and which ones aren’t). When the share price rebounds for a second time, the handle is complete. Most investors believe this is the point to enter into a long position on the stock.