Cup And Handle Definition

As mentioned, we may see triangles, or we may also see trading ranges or channels. Below is an example of a EUR/USD cup and handle daily chart, where the handle represents a channel or trading range angled down. After the high forms on the right side of the cup, there is a pullback that forms the handle.

• If you trade a bearish Cup with Handle your stop loss order should be placed above the upper level of the handle.
• During a period of consolidation, the price remains relatively flat or even trends upward a bit .
• In this example, i have plotted a horizontal line above the handle highest high, then another horizontal line below the lowest low of the cup.
• Now that we know what is Cup and Handle, let’s walk through the trading rules of the Cup and Handle trading strategy that can set you apart from the rest of the crowd.
• The pattern is nicknamed ‘saucer’ because of the clear ‘U’ visual shape that it forms.

By having the handle and stop-loss in the upper third of the cup, the stop-loss stays closer to the entry point, which helps improve the risk-reward ratio of the trade. The stop-loss represents the risk portion of Price action trading the trade, while the target represents the reward portion. That recovery swing may end at the old high or exceed it by a few points and then reverse, adding downside fuel because it traps two groups of buyers.

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He is an expert in trading and technical analysis with more than 25 years of experience in the markets. Alan received his bachelor’s in psychology from the University of Pittsburgh and is the author of The Master Swing Trader. They form when bulls or bears make two failed attempts to break through support or resistance levels. To trade cup and handle pattern the head and shoulders we will first look for a pullback or horizontal consolidation during a strong bull trend. Price falls in a downtrend before pulling back to form the left rim of an upside-down cup. The low point of the cup handle is generally a good stop-loss, but ideally, we will want to see a short and near-horizontal handle.

Sometime afterwards, the price action reaches the second target on the chart. You have the option to close your entire position at this second take profit target. However, you could opt to hold a portion of the trade for further gains if you see price action continuing to trend upwards. The yellow line on the chart is an upward trend line, which measures the bullish activity of the price action.

Bitcoin And Gold Correlation Leads To Matching Cup And Handle Patterns

It looks like Alice is forming massive Cup&Handle pattern starting from August 2021. The potential targets for the next impulsive wave is on the chart according to Fib levels. The price target following the breakout can be estimated by measuring the distance from trading strategy the right top of the cup to the bottom of the cup and adding that number to the buy point. 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.

A cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities. A significant increase in volume observed after the breakout above resistance defined by the cup’s rim or neckline would help confirm the move. A stop loss order could be entered safely beneath the pattern’s neckline level, which should now provide support to the market. Profits would be taken ahead of the pattern’s measuring objective. William O’Neal gave us the cup and handle patterns in his 1988 book titled “How to Make Money in Stocks”.

Disadvantages Of Trading With Chart Patterns

It’s best to have a fixed set of rules to trade breakout and then just trade it when it happens. You can go down to the lower timeframe and analyze but it may or may not increase the odds of a breakout working out. Thank you for reply, entry above the handle is after breakout, where we can entry in pre-break out. This means it could be the start of a NEW uptrend and the last thing you want to do is cut your profit short. “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.

The height of the formation also serves as the price target for a reversal when the neckline is breached. Flags form when prices consolidate after sharp trending moves. In an uptrend, a flag pattern will form when prices consolidate by forming lower highs and lower lows to signal a period of profit-taking. A break outside the upper falling trendline will be a signal that bulls are ready to drive prices higher for the next phase.

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Prior to the decline that started the cup and handle pattern, the price had advanced about 30% over several months. The upward momentum carried through following the cup and handle. The price may drop slightly, then rally back up, forming another handle or breaking above the initial handle. There is also an upside-down cup and handle pattern, called the inverted or reverse cup and handle. This is a bearish pattern and it looks different to the traditional cup and handle. An ‘inverted cup and handle’ is a chart pattern that indicates bearish continuation, triggering a sell signal.

Cup and handle patterns are also traded in the forex market, especially by day traders​​. When intraday trading, cup and handles tend to perform better during active times of a specific currency pair. When the forex markets are not open, the pair tends to be quieter, which means less movement, and it also means that intraday cup and handle patterns will not form as strongly. This is because there is not sufficient momentum to fuel a breakout and bullish trend. As a general rule, cup and handle patterns are bullish price formations. Founder of the term, William O’Neil identified four primary stages of this technical trading pattern.

Volume Breakout Indicator

If you trade chart patterns, you want to exit your trade when the pattern is completed. That’s why in this trading strategy guide, I want to dive deep into the Cup and Handle pattern so you, yourself, can find your own “monster” breakout trades. Commentary and opinions expressed are those of the author/speaker and not necessarily those of Mint Global. Mint Global does not guarantee the accuracy of, or endorse, the statements of any third party, including guest speakers or authors of commentary or news articles. All information regarding the likelihood of potential future investment outcomes are hypothetical.

Your first take profit target should be located on a distance equal to the size of the handle, starting from the breakout point. If this target is completed, you can then start pursuing the next target. The second target is located on a distance equal to the size of the cup, applied again from the moment of the breakout. As we point out earlier, you would prefer to open a trade after confirming the Cup with Handle pattern. If the pattern is bullish, the signal should be a bullish breakout through the handle.

Entering A Cup And Handle Trade

GSIC rallied strongly from penny stock land and then formed a nice Inverted Cup & Handle pattern with easily defined resistance. Notice the volume starting to pick up on the right side of the cup and then drop off on the left side of the handle before surging during the breakout. In cup and handles, as with other breakout setups, the price might make several false breaks and possibly reverse for a while. If the stops are too close, the trade can close on a loss, even if the breakout eventually goes in the right direction. The cup and handle is one of the easiest chart patterns to identify, because we all can recognize a cup.

To indentify peaks and troughs, we can use a smoothing function like moving average. 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.

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Author: John Schmidt