Cup And Handle Pattern: How To Identify And Take Leverage Of It?

Traders wait for the handle pattern to form, which may either be in the shape of a sideways handle or a triangle. When the stock price breaks out above the top of the handle, that indicates completion of the cup-and-handle pattern, and creates a signal that stock price could continue to rise. If the left and right sides of the cup are different heights, the smaller side would give a more conservative price target, and the taller would be a more aggressive target.

Both groups are now targeted for losses or reduced profits, while short-sellers pat themselves on the back for a job well done. O’Neil included time frame measurements for each component, as well as a detailed description of the rounded lows that give the pattern its unique teacup appearance. Thomas Bulkowski’s backtests are also lacking strict buy and sell rules, and he argues the cup and handle strategy is inferior to many other patterns. To qualify as a cup and handle pattern, the retracement of the cup should be 1/3 or less of the previous advance.

Risk Management with Cup and Handle Pattern

Please follow Saito-Chung on Twitter at both @SaitoChung and @IBD_DChung for more on growth stocks, charts, breakouts, sell signals, and financial markets. The handle alone needs at least five days to form, but it could go on for weeks. Make sure it doesn’t exceed the cup portion in time or size of decline. A good cup with handle should truly look like the silhouette of a nicely formed tea cup. The handle always shows a smaller decline from high to low; it represents a final shakeout of uncommitted holders, sending those shares into sturdier hands in the market. If the cup and handle form after a downtrend, it could signal a reversal of the trend.

• If the price keeps rising and does not reverse, there is a chance of missing the trade.
• This drop, or “handle” is meant to signal a buying opportunity to go long on a security.
• For additional confirmation, look for the bottom of the cup to align with a longer-term support level, such as a rising ​trendline or moving average.
• This rally failed to reach the measured move target at 50, calculated by adding the four-point depth of the cup to the resistance line near $46.
• If the cup is in a V-shape, the reversal will be too sharp of a movement.

Let’s consider the market mechanics of a typical cup and handle scenario. A new rally prints a high, and the price rolls over into a correction, flipping relative strength oscillators into sell cycles that encourage strong-handed longs to exit positions. New buyers enter the pullback at the 38.6% or 50% retracement level, expecting the prior uptrend to resume. The security bounces and tests the high, drawing in aggressive short-sellers who believe that a new downtrend will elicit a double top breakdown. An inverse cup and handle pattern forms with the bottom of the cup being at the top of the stock’s price movement. The handle forms as a subsequent, smaller upward movement at the top of the cup (near the bottom of the chart pattern).

Two Free Trading Strategies: A Short Practical Guide for Beginners

Volume should increase on the breakout, signaling increased investor interest and confidence in the stock. This often results in a rally that can last several weeks or months, and reach the target price that was calculated from the cup and handle pattern. The bottom of the cup is a stabilizing period where the price moves sideways.

• The stock needs to show a 30% uptrend from any price point, but it must be before the base’s construction.
• However, it fails to continue increasing in price and instead reverses and trends downward.
• As long as the bottom forms at less than 50% of the previous uptrend and the handle doesn’t retrace over one-third in regards to the cup’s depth, you should be good to go.
• This prior trend is important as is the duration of the trend.
• This can help you gauge the overall market trend, only to tell if the pattern formation is going in the right direction or not.
• It is considered a consolidation in the uptrend, and the trend is expected to continue moving upward after the consolidation when the price breaks above the resistance of the consolidation.

A Cup With Handle pattern has two parts—a cup and a handle. This prior trend is important as is the duration of the Cup and Handle Pattern trend. After completing the cup pattern, a trading range develops on the right side and the handle is formed.

How much does trading cost?

As a general rule, https://www.bigshotrading.info/s are bullish price formations. The 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 begins, a security will reach a new high in an uptrend.