Cup and Handle Pattern: Definition & Strategy

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The new bullish move finishes approximately around the top of the prior bearish move. Then the price action begins to create the handle, which is a bearish channel type structure. 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.

This is a powerful chart pattern that’s used by stock traders to capture explosive breakout moves — where the stock price could increase 1000+% within a few years. FYI, a moving average is a trend-following indicator that smooths out price movements, and shows you the average value of a security over a certain period of time. The handle is formed inside the trading range when prices fail to reach the previous high, and pull back down to re-test the support line once again. In this article, you’ll learn how to trade the inverted cup and handle step by step so that you can maximize your profits while minimizing your risks. Like all technical indicators, the cup and handle should be used in concert with other signals and indicators before making a trading decision. Specifically, with the cup and handle, certain limitations have been identified by practitioners. The first is that it can take some time for the pattern to fully form, which can lead to late decisions.

What does the cup and handle tells you?

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand cup and handle reversal how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. A secondary correction occurs, with price falling +/- 50% from the peak at . This is high – cup and handle corrections normally vary between 10% and 30%.

The U-shape also demonstrates that there is strong support at the base of the cup and the cup depth should retrace less than 1/3 of the advance prior to the consolidation pullback. The cup can develop over a period of one to six months on daily charts, or even longer on weekly charts. Ideally, the highs on the left and right side of the cup are at roughly the same price level, corresponding to a single resistance level. A Cup and Handle can be used as an entry pattern for the continuation of an established bullish trend.

Cup and Handle Pattern

This includes drawing trendlines for the handles to highlight the breakout points, notes to mark important areas, or arrows to highlight potential entry and exit points. We also offer a chart scanner with pattern recognition https://www.bigshotrading.info/ software that works automatically to detect and highlight trends for your ease of trading. A price forms this pattern as a retest of the previous high, causing selling pressure from traders who bought an asset near it.

• A stop-loss can be placed below the low price point in the handle.
• The beginning of the price decrease and the end of the price increase are approximately on the same level.
• Under normal conditions, they are not expected to signal trend reversals, but nothing is perfect in the market.
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• It also defines the entry point, stop-loss, and target placement guidelines.

Finally, the handle should move lower to about half of the top of the handle. Forex trading involves significant risk of loss and is not suitable for all investors.

Predictions and analysis

In particular cup and handle patterns, various limitations have come up over the years that have been discovered by traders and investors. 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. The stop-loss order should be set above $99, since that is the halfway point of the cup. When a stop-loss is below the halfway point, it is better to reject such trades. A stop-loss order saves traders if the price drops, even after a stock forms the cup and handle chart. The stop-loss will sell off the stocks as soon as the price goes down to a specific price set on the handle.

It’s important to wait for the cup and handle pattern to form completely before entering a position. Once the cup and handle pattern has fully formed, you can look for a breakout above the cup. A few key factors contribute to forming a cup and handle pattern. Investor sentiment is important– cup and handle patterns typically appear when investors feel bullish but are starting to get a bit cautious. 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.