Anatomy Of A Cup

Stay on top of upcoming market-moving events with our customisable economic calendar. The main idea of this method is to find the local extrema from price data, then define pattern via condtion of these local extrema. Last year I spent several weeks working with my friend from Princeton to implement Cup and Handle pattern scanner. I would now like to share some of our key findings during the development of the algorithm.

cup with handle formation

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 foreign exchange market begins, a security will reach a new high in an uptrend. Second, the security will retrace, dropping no more than 50% of the previous high creating a rounding bottom.

Cup And Handle Patterns Simplified

This means that you could potentially see this formation on many different time frames on a chart. It is a bullish continuation pattern, which means the pattern itself leads to a continuation of the prevailing, bullish trend. Now that we have covered a short introduction to the cup and handle pattern, let’s walk through a few day trading strategies that can separate you from the crowd. Cup and handle patterns are pretty common whenstock trading. The cup is shaped like a U and the handle trades to the right side.

  • The cup can be spread out from 1 to 6 months, occasionally longer.
  • On this day, 345,500 shares of Winnebago were traded—almost 475% above the 50-day average trading volume of 60,100 shares.
  • They provide a logical entry point, a stop-loss location for managing risk, and a price target for exiting a profitable trade.
  • However, crypto trading takes place on many different exchanges — and even off the exchange.
  • If you are looking at a “V” shape cup, then the signal is most likely invalid.

It would have been nice to get a big breakout from the get-go, but this isn't rocket science – patterns don't always work perfectly. As long as the stock stays in its uptrend, there is no reason to exit the trade. The cup and handle pattern is a very common pattern in technical analysis and a very bullish one. The problem with the setup is that everyone uses the same approach when determining entry and exit for the formation. What if there was another way to set your target, which can account for the specific pattern you are trading?

Any retracement more than 50% invalidates the cup and handle formation. The cup-with-handle formation in itself does not signify a “buy” signal. They often roll over, forming the right shoulder of a head-and-shoulders topping pattern and fail disastrously. From the cup-with-handle pattern identification point, the user should wait for the stock to break out on significant volume before buying. If it goes too long, the cup and handle might not develop as you would expect. To figure out the profit target when trading a cup and handle pattern, compare the price at the bottom of the cup to the price at the start of the handle.

Entering A Cup And Handle Trade

Cup depth should retrace about one-third of the previous advance, at the most. 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. Check out this guide to learn how to scan for active low float stocks daily.

cup with handle formation

In this example, the stock RHI had a nice bottom that formed into a deep cup. The important item to note is that the right side of the cup cut through the Ichimoku cloud and even made an attempt at trying to move beyond the cloud itself. 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. Some traders take a long position once price breaks out of the handle placing a stop below the handle. To put it another way, the cup and handle may not look perfect but if you know what it means you can still trade it.

The stop loss order of the trade needs to be placed above the handle. Its location is shown with the red horizontal line on the chart. Drawing the Cup and Handle pattern might seem tricky at times. The reason for this is that the pattern cannot be drawn with a straight line.

Cup And Handle

Check out ourstock trading serviceto learn more and become a part of our community. In fact, you want to avoid a sharp V shape because this then changes the pattern. As a result, the cup should resemble a bowl or kind of a rounding bottom. New Cycle Trading and Analytics has partnered with Options Money Maker to provide the tools, education and support traders need to be successful.

What is a cup without a handle called?

BEAKER. a cup (usually without a handle) a flatbottomed jar made of glass or plastic; used for chemistry.

The Cup with Handle trigger signal is at the break out of the handle. The handle breakout acts as a confirmation of the pattern. When Forex dealer you identify the handle breakout, you can plot the two targets of the pattern – the size of the handle and the size of the cup.

Often the strength or weakness of the overall market will dictate the success of the pattern. 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. It is interpreted as an indication of bullish sentiment in the market and possible further price increases. Cup and handle patterns are also traded in the forex market, especially by day traders​​.

Understanding Cup And Handle Patterns With Examples

The result of the pattern remains the same where it is a minor breakout higher, but then prices trade sideways on declining volume to form the handle. The pattern is confirmed when the market breaks above the highest price of the handle. The cup part of the pattern should be fairly shallow, with a rounded or flat “bottom” (not a V-shaped one), and ideally reach to the same price at the upper end of both sides. The drop of the handle part should retrace about 30% to 50% of the rise at the end of the cup.

Is a head and shoulders pattern bullish?

The head and shoulders chart is said to depict a bullish-to-bearish trend reversal and signals that an upward trend is nearing its end. Investors consider it to be one of the most reliable trend reversal patterns.

These products may not be suitable for everyone and you should ensure that you understand the risks involved. To contact the author please use the email address below. 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. The next logical thing we need to establish for the Cup and Handle trading strategy is where to take profits.

Normally, the handle of a tea cup can take many shapes. This can be the same when reading the price action for the Cup and Handle formation. If the pattern is bearish, sell when the price breaks the handle downwards. If the pattern is bullish, buy when the price breaks the handle upwards.

Golds Cup And Handle Pattern

Inverted ‘U’ shaped – ideally price consolidation resembles a bowl or rounding top. Concept is the softer inverted ‘U’ shape is a consolidation cup and handle pattern with valid or true ‘resistance’. The cup and handle pattern is one of the oldest chart patterns you will find in technical analysis.

Is cup and handle formation bullish?

The cup and handle is considered a bullish signal, with the right-hand side of the pattern typically experiencing lower trading volume. The pattern's formation may be as short as seven weeks or as long as 65 weeks.

This will avoid jumping into a cup and handle pattern too early by entering a false breakout. For traders who want to add a little more certainty to their trade, they should wait for the price to close above the upper trendline of the handle. The cup and handle pattern is a bullish continuation pattern and momentum buy signal as it breaks out of the ‘handle’ in the formation.

Target 2 – equals the vertical size of the cup applied at the moment of the breakout through the handle. The Cup with Handle pattern has its bearish equivalent, and is referred to as an Inverted Cup and Handle formation. This is the hourly chart of the USD/CAD Forex pair for March 25-30, 2016. The image illustrates the way a bearish Cup and Handle pattern could be traded. The stop loss order of this trade needs to be placed below the lowest point of the handle. This is shown with the red horizontal line on the image.

cup with handle formation

Aside from having a clearly defined pattern with specific entry and exit parameters, this chart pattern is a favorite among traders because it is simple to identify. There aren’t a lot of fancy indicators or technical tools needed to spot the pattern. The inverted handle pattern forms when the asset emerges out and begins to fall from the right side of an inverted cup.

Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances. We recommend that you seek independent advice and ensure you fully understand the risks involved before trading. Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors.

Author: Ben Lobel