Profitable Cup And Handle Trading Strategy

Cup and handle patterns can happen on both daily and weekly charts. Look for a ‘U’ shape and volume that dries up near the cup’s low. Volume that dries up at the bottom suggests funds lost interest in selling. A cup-with-handle base usually corrects 20% to 30% from the base’s left-side high. Most are three to six months long, but can be as little as seven weeks or as long as a year or more.

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• The high and the low of this candle could be used to draw a horizontal support / resistance zone on the chart.
• Founder of the term, William O’Neil identified four primary stages of this technical trading pattern.
• Lastly, it has been identified that at times cup and handle patterns can be unreliable in illiquid stocks.
• Steve has more than 30 years of investment experience with an expertise in options trading.

This is essential if the stock is to be projected to new highs after the breakout. Consequently, we require the distance from the left cup to the pivot, to be at least 6 weeks . On the other hand, Dividend we don’t want the cup to be so long as to be meaningless, so there is a maximum cup length of 325 sessions imposed. A complete list of our criteria is provided at the end of this article.

The dot will be magenta above the bar high if it marks the beginning of a Wave 5 down. The dot will be dark green below the bar low if it marks the beginning of a Wave 5 up. This point has been found to have a high correlation with potentially significant moves following a Wave 4.

Cup And Handle Trading Strategy

The second run usually works as the sellers have been worked through and the stock breaks out to new highs. The cup pattern typically lasts for several weeks to six months or longer, but the duration of the handle is the most important feature. The handle should complete within a month, or else it may signal that there is not enough momentum to break through the higher resistance level. The cup and handle is considered a bullish signal, with the right-hand side of the pattern typically experiencing lower trading volume. The pattern’s formation may be as short as seven weeks or as long as 65 weeks.

The pattern on the left is more complex as the cup pattern is wavy and harder to identify. The pattern on the right is more traditional, with a clear cup shape, followed by a handle breakout to the upside. Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks.

You want to see several bullish candles with volume above the 50-period moving average, while most of the bearish candles remain below the moving average. If a large bullish and bearish volume candle are next to each other, you want to see the bullish candle display a higher volume than the bearish candle. The Bitcoin chart above also illustrates a high handle, which we discussed in the previous section. After the successful cup and handle portion of the chart, Bitcoin breaks out and accelerates higher.

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For example, if the cup forms between $100 and $99, and the breakout point is $100, the target is $101. Since the handle must occur within the upper half of the cup, a properly placed stop-loss should not end up in the lower half of the cup formation. For example, assume a cup forms between $50 and $49.50. The stop loss should be above $49.75 because that is the half-way point of the cup. If the stop-loss is below the half-way point of the cup, avoid the trade.

As can be seen in the picture above, the handle is the correction of the price to the right side of the cup. As a rule, such a correction takes the form of a flag pattern. Visually, the handle starts where the right side of the cup ends. An indispensable condition is the correction depth which is less than 50% of the right wall of the cup.

Inverted Cup And Handle Pattern

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 Venture fund hands in the market. After the high forms on the right side of the cup, there is a pullback that forms the handle. The handle is the consolidation before breakout and can retrace up to 1/3 of the cup’s advance, but usually not more.

At this point, an investor may purchase the stock, anticipating that it will bounce back to previous levels. The stock then rebounds, testing the previous high resistance levels, after which it falls into a sideways trend. In the final leg of the pattern, the stock exceeds these resistance levels, soaring 50% above the previous high. According to Bulkowski , the averaged maximum decline of the inverse cup and handle is 16%. Activision Blizzard formed a cup on its weekly chart from November until August of 2019 and then a handle from September to December of 2019 before eventually breaking out.

This is measured by our Right Cup Quality indicator and is a component of our overall Chart Quality metric . However, there was a quick recovery and the stock traded back up within the normal handle boundaries within a week. I believe the essence of the formation remained valid after this sharp decline.

The stop-loss serves to control risk on the trade by selling the position if the price declines enough to invalidate the pattern. Chart patterns occur when the price of an asset moves in a way that resembles a common shape, like a triangle, rectangle, head and shoulders, or—in this case—a cup and handle. They provide a logical entry point, a stop-loss location for managing risk, and a price target for exiting a profitable trade. Here’s what the cup and handle is, how to trade it, and things to watch for to improve the odds of a profitable trade. Most traders set a target by adding height to the breakout point of the handle, irrespective of the cup’s height.

What Is A Cup And Handle?

In some especially volatile cases, retracement could also be much greater, so the one-third guidance is not an absolute requirement. Designed for ALL levels of traders and traders with limited time. For traders who have the time and are seeking an active trading environment, our live trading room is the place to be. The first bullish move took price to the resistance price of $63. An example of a cup and handle is seen on the chart of Microsoft.

Sometimes the left side of the cup is a different height than the right. Use the smaller height, and add it to the breakout point for a conservative target. Try to limit your picks to cups that are no more than 30% or 33% deep, except for those built during a bear market. In that case, an exceptional growth stock can fall 40%, 50% or more and still make a successful breakout.

New Ways To Trade The Cup And Handle Pattern

Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should cup and handle pattern consider trading. Past performance is not necessarily indicative of future results. The 1975 to 1978 cup and handle pattern was so strong that Gold exploded higher before forming any handle.

For stock prices, the pattern may span from a few weeks to a few years; but commonly the cup lasts from 1 to 6 months, while the handle should only last for 1 to 4 weeks. Prices then break the uptrend established by the right side of the cup, thus creating the handle. Prices reverse in a “V” formation rising until the high established by the right side of the cup. 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. For instance, let’s say a cup forms between $100 and $98.

The Conditions For The Cup And Handle Pattern

In many cases, the handle is locked within a small bearish channel on the chart. We measure the price/volume action in the handle using a proprietary metric called Handle Quality , which is also a component of CQ, mentioned earlier. Plots horizontal dotted lines on today’s intraday chart showing last week’s high, low, and mid-point prices. To use the Hourly Pivot Lines indicator, you must construct a multi-data chart with a 5-minute chart as Data1 and a 60-minute chart as Data2. The upside price target is calculated by adding the distance from the bottom of the cup to the top to the top. Call me crazy, but actually using the technicals right in front of my face makes far more sense than applying some universal profit target system.

The perfect pattern would have equal highs on both sides of the cup, but this is not always the case. Join our community on Telegram to interact with us and other Phemex traders. A price target could be between 20%-30% but they can go higher and of course they can also fall back in price and fail which is why a stop loss is always important.

The Cup And Handle Pattern

At this point, the cup and handle pattern should be evident. The handle will typically form a descending trendline – aim to enter when the price breaks above this descending trendline. Also watch for sharply increasing trade volume, as that indicates that the stock may be about to break out. There are a couple of variations to this pattern that crypto traders need to be aware of. First, there are times when the handle portion of the pattern develops above the old high. This is considered the “high handle.” Secondly, since the market is fractal, these patterns will form on a variety of charting time frames, including intraday charts.

Author: Chris Isidore