The pattern’s resistance point is either a horizontal resistance line, an upward sloping resistance line, or a downward sloping resistance line. The cup and handle pattern formation process begins with the cup component forming on the left side of the pattern after a consolidation period in the price action. The market asset price rises before a price pause and retracement and then price coils and trends higher to reach the prior price pause point.
To maximize the reliability of the cup-and-handle pattern, keep in mind that it should be utilized in conjunction with other analysis techniques. Turn your attention rightward from the cup, and brace for a consolidation episode. This ‘handle’ segment might either drift sideways or slightly dip. It’s less deep compared to the cup and resides within its upper half.
- However, make sure to use other technical indicators such as volume to confirm.
- The cup and handle pattern traders are scalpers, day traders, swing traders, position traders, professional chartered technical analysts, and active investors.
- You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion.
- It also allows the stock some movement within the handle’s range.
- A cup-and-handle pattern is usually interpreted as a bullish continuation pattern.
- The cup has a “U” shaped pattern made by consecutive lows followed by consecutive highs in the candlestick chart.
In this case, it is wise to use the smaller height and add it to the breakout point for a safer target. Traders can also use the larger height to achieve a more aggressive target. An ideal trade would be to ensure a handle occurs within the upper half of the cup. An intelligent trader would place a stop-loss order in a way that it doesn’t end up in the lower half of the cup formation.
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It’s important to note that the cup should be round rather than V-shaped. One of its limitations is the ambiguity of the pattern formation. The failure rate is 26%, above the 20% that Bulkowski considers acceptable.
What Is The Importance Of a Cup and Handle Pattern?
For example, if the distance between the bottom of the cup and the handle breakout level is 20 points, a profit goal is set 20 points above the handle of the pattern. Depending on the trader’s risk tolerance and market volatility, stop-loss orders can be placed either below the handle or below the cup. Traders need advanced knowledge of technical analysis to know the entry and exit points in cups and handle patterns. In both, the cup and handle pattern and the inverted cup and handle pattern, the entry is taken at the breakout point.
What does a cup and handle pattern indicate?
Monitoring intraday price action as well as the cup and handle pattern daily chart then becomes critical for timing entries. Initial breakouts sometimes fail, causing prices to return to the upper rim line which potentially sets up better risk/reward buy points. To scan for a cup and handle pattern, you can use manual charting techniques to look for the U-shape pattern in a stock’s price action. You can also use automatic screeners such as TC2000 to look for the pattern. Our daily swing trading report, The Wagner Daily, also highlights top cup and handle patterns as they develop. The pattern completes only when the price breaks out from the handle’s trading range to signal the continuation of the previous rally.
How to Identify a Cup and Handle Pattern
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Trading cup and handle boils down to reacting quickly once the pattern is confirmed while enforcing smart entry, stop, and target protocols. When evaluating any chart pattern, smart traders rely on statistics – not hunches. Let’s dive into all things cup with handle patterns so you can start trading them with confidence.
Traders may experience excess slippage and enter a false breakout using an aggressive entry. Low volume during a cup and handle price breakout indicates that there are no large buyers entering the market and that traders lack conviction that market prices will rise. A cup and handle pattern confirmation technical indicator is the volume indicator as the volume indicator confirms whether there are large buyers behind a price breakout upward move. The cup and handle pattern traders are scalpers, day traders, swing traders, position traders, professional chartered technical analysts, and active investors.
As you can see in the chart, the price reached the projected target before making a pullback. 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.
Secondly, you need to learn to identify the length and depth of a true cup and handle, as there can be false signals. Lastly, illiquidity also restricts the cup and handle from fully forming as trading volume also affects an asset’s price. The 200-day moving average is a key technical indicator used to gauge a stock’s long-term 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. If the trend is up and the cup and handle form in the middle of that trend, the buy signal has the added benefit of the overall trend.
This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. If you’re not ready to take on the live markets, you can open a risk-free demo account to identify the cup and handle pattern and practice your trades.
Both groups are now targeted for losses or reduced profits, while short-sellers pat themselves on the back for a job well done. A good time to buy is when the price of the asset moves up and exceeds the price levels seen previously at the top of the right side of the cup. To confirm the pattern, there should be a substantial increase in volume on the breakout above the handle’s resistance. If you’re looking for a trading platform, check out StocksToTrade.
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. When the handle is completed, safe haven investments a breakout from the handle’s trading range signals a continuation of the prior advance. The breakout from the handle’s trading range signals a continuation of the prior uptrend.