The cup pattern typically lasts for several weeks to six months or longer, but the duration of the handle is the most important feature. The handle should complete within a month, or else it may signal that there is not enough momentum to break through the higher resistance level. Chart Patterns are commonly leveraged by technical traders across all asset classes to predict the future movement in price trends. One prominent chart pattern that traders use is the Cup and Handle Pattern. The pattern gets its name from its appearance that resembles a teacup with a handle.

cup and handle formation

As the rally gains steam sentiment improves dramatically and new buyers begin to talk about certain new highs but those that purchased the stock at or near top#1 get ready to sell. These investors may have been waiting as long at 12 weeks for an opportunity to sell their positions without incurring a loss and they are not dissuaded by all of the new found bullish talk. Just short of the old highs at top#1 aggressive selling begins on no specific news but in reality some investors that bought near top#1 have already begun to sell. The stock begins to work significantly lower on increased volume creating a second, well defined top (top#2). The cup and handle tells you that the price will continue with its bullish trend.

Using Moving Averages To Trade The Vix

If the price reverts below the resistance line, it signals that the breakout trade that you entered is no longer valid. Hence, you should consider exiting your position at this stage to minimize losses, and a stop-loss order will allow you to do that. Additionally, there are several other chart patterns, such as the Rounding Bottom Pattern, that look similar to the Cup and Handle Pattern, but would require a very different trading approach. Together, these three price movements stated above – the downward slope in price, followed by a flat price range, which in turn is followed by an uptrend – completes the “Cup” part of the pattern. It can also take long timeframes for the pattern to form completely. Often, other indicators may need to be used to confirm signals.

What is MACD signal?

Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. … Traders may buy the security when the MACD crosses above its signal line and sell—or short—the security when the MACD crosses below the signal line.

During bear markets, some good cup with handle bases show a large, double-digit decline within the handle. The stock needs to show a 30% uptrend from any price point, but it must be before the base’s construction. Or, the stock must show a minimum 20% increase from a prior breakout. ✅This pattern is not as popular among traders as “Head and Shoulders”, “Double Top” and other classic patterns of technical analysis. In fact, the “Cup & Handle” pattern is in no way inferior to the above patterns in its reliability and, if used correctly, can bring…

Cup And Handle Chart Pattern Explained

Most are three to six months long, but can be as little as seven weeks, or as long as a year or more. Enter a pending buy order to activate at a price just above the main resistance line. Set the order to expire if the price does not reach the entry level within a time limit. The time limit will depend on the chart’s period, but it should be no longer than about half the time taken to form the handle.

It can move sideways as well, or it could decline after entry. The pattern is complete when the price moves out of the handle. We mentioned above the need for constructive price/volume action while the stock is building the right side of its cup. This is measured by our Right Cup Quality indicator and is a component of our overall Chart Quality metric . Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level.

How To Find Momentum Stocks

Let C is the lowest price in range , we then superimpose a 5×5 matrix using A, B, and C as milestones. To indentify peaks and troughs, we can use a smoothing function like moving average. 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.

The confirmation of the formation is illustrated with the small green circle when the price action breaks the handle downwards. This would be an advantageous time to sell the USD/CAD Forex pair. If you look at the regular cup and handle pattern, there is a distinct ‘u’ shape and downward handle, which is followed by a bullish continuation. This means the inverted cup and handle is the opposite of the regular cup and handle.

Cup And Odd Handle

You can use it to analyse stocks, currencies, bonds, commodities, and index funds among others. Finally, you can use a buy-stop trade to take advantage of a bullish trend. This is a situation where you place a buy-stop order above the resistance. In this case, a bullish trade will be opened after the price rises above the resistance level.

Users are encouraged to use their best judgment in evaluating any third party services or advertisers on this site before submitting any information to any third party. Testimonials on this website may not be representative of the experience of other customers. No testimonial should be considered as a guarantee of future performance or success. 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 what is Cup and Handle pattern.

  • Whether the market is up, down, or sideways, the Option Strategies Insider membership gives traders the power to consistently beat any market.
  • The cup pattern happens first and then a handle happens next.
  • The cup and handle pattern is characterised by a U-shaped cup and a slight downward drift in price action, which is the handle.

Sometimes the left side of the cup is a different height than the right. Use the smaller height, and add it to the breakout point for a conservative target. The cup can be spread out from 1 to 6 months, occasionally longer. The next pullback carves out a rounding bottom no deeper than the 50% retracement of the prior trend. The security posts a significant high in an uptrend that accelerated between one and three months prior.

Golds Super Bullish Cup & Handle Pattern

It’s the starting point for scoring runs and winning the investing game. 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 can be placed below the low price point in the handle.

Is a hammer bullish or bearish?

The hammer candlestick is a bullish trading pattern that may indicate that a stock has reached its bottom, and is positioned for trend reversal.

If the pattern is bearish, sell when the price breaks the handle downwards. As you see, the price action breaks to the lower level of the S/R zone, which indicated that the price will probably continue in the bearish direction. Note the large bearish move on the chart following the breakdown. The bullish Cup and Handle pattern is the one we have been discussing so far. It starts with a bearish price move, which gradually reverses. The new bullish move finishes approximately around the top of the prior bearish move.

Structure Of The Cup And Handle Technical Pattern

When the Handle portion does exceed this one-third mark, the likelihood that the price will be able to bounce back again gets reduced considerably. Essentially, this can be seen as an indication that the downtrend will continue, and that the anticipated rebound will not hyperinflation occur. Some traders like to add a buffer of 1 ATR below the handle, rather than placing the stop-loss at the exact low of the handle. This is because traders don’t want to get stopped out prematurely. Let’s see how the pattern can be used to place entry and exit points.

What does the T2108 measure?

For those needing a refresher, the T2108 measures the percentage of stocks trading above their 40-day moving average. I have used it quite a over the years to help determine the strength of market moves.

Please see the further, important disclosures about the risks and costs of trading, and client responsibilities for maintenance of an account through our firm, available on this website. We hope that the Cup and Handle pattern examples provided throughout this article will improve your ability to spot this powerful pattern when trading real funds. The rounded bottom really shows the buyers are in control and thus new highs should be expected.

Cup And Handle Pattern: Definition & Strategy

You would typically look to buy the AUD/USD Forex pair when the candle closes above the handle. Now let’s demonstrate the bullish and the bearish Cup and Over-the-Counter Handle strategy in action. The examples below will help clear out any questions you may have related to trading the Cup and Handle pattern in Forex.

cup and handle formation

The volume aspect can be skipped for forex trading, although forex traders prefer to use it to confirm trend continuation or breakout. The inverted cup and handle is the opposite version of bullish cup and handle. The cup and handle formation formation starts with at the lows as price recovers to form a rounding top like an upside U shape before selling off to form a bear flag. The rounded part is the Cup and the small bearish channel is the handle.

cup and handle formation

In this case, the cup shape is inverted such that it represents a resurgence in price after a downtrend followed by a downward movement. The handle slopes upwards before breaking out sharply downward to continue the original bearish trend. The pattern forms during as a result of consolidation a bullish movement and indicates a continuation of that bullish trend after its completion. To identify the cup and handle pattern, begin by following the movement of price on the chart. The pattern forms when it notices a sharp downward price movement over a short period.

Author: Corinne Reichert

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