A cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities. As stocks attain new highs, there is selling pressure among investors to book profits, causing the price to fall. The formation of the base or rounding bottom of the cup marks a period of stabilisation. The price then rises during the rally approximately to the level of the previous advance, thus completing the cup. The cup and handle is a bullish continuation pattern that marks a consolidation period followed by a breakout.
- The downward trend in the handle should not typically breach the 1/3 mark of the cup’s advance.
- For this trade, a profit target will be determined by measuring the vertical distance between the bottom of the cup and the resistance trend line, connecting two highs of the cup.
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- A cup and handle is a technical analysis pattern that appears on a chart as a U-shaped pattern, followed by a small downward drift, resembling a handle.
Those that like them see the V-bottom as a sharp reversal of the downtrend, which shows buyers stepped in aggressively on the right side of the pattern. Chart patterns, like a triangle, rectangle, head and shoulders, or—in this case—a cup and handle are a visual way to trade. The cup and handle pattern, also sometimes known as the cup with handle pattern was first identified by stockbroker William O’Neil in 1988. 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.
However, the pattern must be complete, as instances of the cup and handle pattern failure are not uncommon. The target with the cup and handle pattern is the height of the cup added to the breakout point of the handle. Generally, these patterns are bullish signals extending an uptrend.
How to identify a cup and handle pattern
We always recommend you to backtest first the pattern and trade it a few times on a demo until you’re comfortable and have a good understanding of how to trade this setup. The best way to set the target is to measure the distance from the bottom of the cup to the top of the cup. One we enter our second buy order we can now safely move the SL for both positions below the Handle swing low. The rounded bottom really shows the buyers are in control and thus new highs should be expected.
See that the target has been applied downwards from where the breakout occurs. It should be equal to the size of the bearish channel created around the handle. If you consider the beginning point of the bullish move and the end point of the bearish move, they are at approximately the same level. It should be applied downwards right from the moment of the breakout.
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. As with most chart patterns, capturing the pattern’s essence is more important than the particulars. The cup is a bowl-shaped consolidation, and the handle is a short pullback followed by a breakout with expanding volume.
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How Do You Find a Cup and Handle Pattern?
There are two types of cup and handle formations in forex depending on their potential. If you are studying a price action, you should definitely know Cup and Handle formation. In this educational article, I will teach you how to identify this pattern. We will discuss its psychology and I will share with you 2 trading strategies. The cup and handle pattern psychology is interesting to explore. You can see how volumes and fear of price fall can cause great up-and-down swings in a stock price.
Understanding the Cup and Handle Pattern
Cup and handle patterns are found on all timeframes, from intraday charts up to weekly and monthly charts. A cup and handle is a technical analysis pattern that appears on a chart as a U-shaped pattern, followed by a small downward drift, resembling a handle. In the world of forex and gold trading, recognizing chart patterns can be your key to unlocking profitable opportunities. One such pattern, the Cup and Handle, offers traders a powerful tool for identifying potential bullish trends. In this comprehensive article, we’ll explore how to identify and trade the Cup and Handle pattern in both forex and gold markets…. As a general rule, cup and handle patterns are bullish price formations.
What Happens After a Cup and Handle Pattern Forms?
With this trading strategy, you may reduce your risk compared to other strategies and generate a considerable return on capital. A chart pattern extensively used by traders is the cup and handle pattern. This pattern visually resembles a U-shaped cup with a slightly downward drifting handle. It is used to identify good buying opportunities and book profits, especially in the long term.
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What does a cup and handle pattern indicate?
There is a risk of missing the trade if the price continues to advance and does not pull back. The target of the Cup and Handle pattern is the height of the cup added to the breakout of the resistance trend line connecting the two highs of the cup. An “inverted cup and handle” is a bearish pattern, triggering a sell signal. 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 practise your trades. You can use derivatives such as CFDs to trade when you see the cup and handle pattern.
Moreover, you should closely monitor the volume as the breakouts with low volume is less likely to sustain. You may also confirm the strength of breakout based on other technical parameters. The good thing about the pattern is that they can be easily located along with a proper entry point with predefined risk-reward. IG International Limited is licensed https://1investing.in/ to conduct investment business and digital asset business by the Bermuda Monetary Authority. Discover the range of markets and learn how they work – with IG Academy’s online course. SpeedTrader provides information about, or links to websites of, third party providers of research, tools and
information that may be of interest or use to the reader.
Sometimes it forms within a few days, but it can take up to a year for the pattern to fully form. 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 Cup and Handle Pattern is a technical analysis charting pattern used in stock market trading, resembling a cup with a handle when illustrated.