Cup and Handle Pattern: What Does It Mean?

Cup and Handle Pattern

The important trend line is the resistance trend line, which is the top line. If prices break above resistance on rising volume, then the market will likely continue its trend higher. To spot a true inverted cup and handle pattern, the shape needs to be obvious and the trend line needs to curve up and then down like an upside-down cup. When this reversal pattern happens, it tells you that it is not a good probability to trade if pullback or correction is not on the way. The inverted handle pattern forms when the asset emerges out and begins to fall from the right side of an inverted cup. However, a true inverted handle happens when it fails to break down and finally meets thesupport leveland attempts to break to a newer low. A cup and handle formation is considered significant when it follows an increasing price trend, ideally one that is only a few months old.

Cup and Handle Pattern

Some traders use momentum strategies because they believe that stocks that have been moving up or down rapidly in price will continue to do so into the future. For example, traders may rely on technical signals like the cup-and-handle pattern to identify stocks that are ready for a breakout. As with most chart patterns, it is more important to capture the essence of the pattern than the particulars. The cup is a bowl-shaped consolidation and the handle is a short pullback followed by a breakout with expanding volume. A cup retracement of 62% may not fit the pattern requirements, but a particular stock’s pattern may still capture the essence of the Cup with Handle. There are several ways to approach trading the cup and handle, but the most basic is to look for entering a long position. Place a stop buy order slightly above the upper trend line of the handle.

Apply the Cup and Handle Pattern to Large and Growing Cryptocurrencies

Now that prices are near their old high, bullish traders stop buying and wait to see if a breakout takes place. Traders who bought near the old high are thankful and nervous at the same time. They are thankful that prices have rebounded back to the old high, but nervous about another selloff. Hence, selling the asset gradually, creating the handle (#4). After a big uptrend in price (#1), the market begins to correct lower (#2), shaping the first half of the cup.

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  • So whenever you see a buildup of higher lows into resistance, it’s a sign of strength.
  • And usually, you exit your trades just before the opposing pressure steps in.
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  • This means that a lot of people are going into the market, which can support even more price increases in the future.

If the cup and handle form after a downtrend, it could signal a reversal of the trend. To improve the odds of the pattern resulting in an actual reversal, look for the downside price waves to get smaller heading into the cup and handle. The smaller down waves heading into the cup and handle provide evidence that selling is tapering off, which improves the odds of an upside move if the price breaks above the handle. Traditionally, the cup has a pause, or stabilizing period, at the bottom of the cup, where the price moves sideways or forms a rounded bottom. It shows the price found a support level and couldn’t drop below it.

How To Trade the Cup and Handle Chart Pattern

Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with.

Cup and Handle Pattern

Typically, it is believed that the upside rally will and once price action has gone above the top of the cup equal to the distance between the bottom and top of the cup. The shape is formed when there’s a price wave down, which is then followed by a stabilization period, followed again by a rally of approximately the same size as the prior trend. This price action is what forms the identifying cup and handle shape. If traders are trying to use the cup-and-handle pattern on stocks with low liquidity, they may face increased risk. The Cup and Handle Pattern has been around for over 30 years and is widely followed by many technical traders.

Cup and Handle Pattern Examples

The price will likely continue in that direction though conservative traders may look for additional confirmation. The target can be estimated using the technique of measuring the distance from the right peak of the cup to the bottom of the cup and extending it in the direction of the breakout. A common stop level is just outside the handle on the opposite side of the breakout. The Inverted Cup and Handle is the bearish version that can form after a downtrend. TradingView has a smart drawing tool that allows users to visually identify this pattern on a chart.

After rallying 300% to begin 2021, Ethereum began consolidating the uptrend to form the cup. The cup was relatively shallow, at nearly 30% of the previous uptrend.

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Cup and handle patterns can also occur on shorter timeframes, although trading these requires quick recognition and confirmation of the breakout at the end of the handle in order to profit. Again, beware cup and handle patterns that form at the end of a trend rather than partway through it, as they are less likely to signal a strong continuation. Cup and handle patterns typically are seen to occur on a daily chart after a strong trend has progressed for one or more months. As a trend matures, the chances that the cup and handle forms decrease, while any cup and handle that does form is likely to produce a smaller continuation movement with less upside potential. I show this as the blue line extending down from point A on the chart to the right.BuyBuy when price closes above the right cup rim .StopThe handle low is a good place to put a stop. Raise the stop as price rises.ThrowbacksThrowbacks hurt performance.Short handleStocks with handles shorter than the median 22 days show superior post breakout performance.

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The cup and handle pattern is part of the so-called continuation patterns. Other such patterns are the ascending and descending triangle pattern and bullish and bearish flags and pennants. However, sometimes, the market closes much higher and you get a poor cup and handle pattern target entry point. This results in a wide stop loss and a smaller position size on your trade. To trade the cup and handle pattern, wait for technical levels of resistance to break. There are two areas where traders can buy the resistance break.