This algorithm works extremely well when backtesting using forex and stock data provided by Finnhub stock api. The accuracy rate for cup and handle pattern for forex and stock on Daily timeframe are 65% and 68% respectively. We automated this backtesting process using the pattern recognition API harmonic scanner. 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.

Rather than trying to define what a cup and handle pattern is in words, it’s best to use a picture to illustrate the pattern. Cup and handle patterns that form at the end of a trend should be avoided because the trend is likely Super profitability to continue. The next pullback carves out a rounding bottom no deeper than the 50% retracement of the prior trend. The security posts a significant high in an uptrend that accelerated between one and three months prior.

cup and handle chart pattern

The security returns to resistance for the second time and breaks out, yielding a measured move target equal to the depth of the cup. 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. A breakout trader looks for levels that a security hasn’t been able to move beyond, and waits for it to move beyond those levels, as it could keep moving in that direction. James Chen, CMT is an expert trader, investment adviser, and global market strategist.

Shallow cups or retracement that fails to get back to the previous resistance level can see the pattern fall apart when it comes time to form the handle. This is why it’s so important to pay attention to volume when assessing the pattern strength. While easy to identify and trade, there are some key drawbacks to cup and handle patterns. Most will form between a month and a year, which can make it difficult to spot for traders looking at a narrower scope of stock behaviors. As a result, many traders see a cup and handle pattern too late. No matter what the pattern ultimately looks like on a chart, the cup and handle is a classic continuation pattern.

Also consider that the breakout may have started later in the day. Even if all other parameters come together, you should avoid stocks that break out below their 10-week moving average. A loose, choppy base shows the stock needs to go far for price discovery.

Consider a scenario where a stock has recently reached a high after significant momentum but has since corrected, falling almost 50%. 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, Major World Indices 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. One of the simplest strategies is to wait for the cup to form and use its price data to set entry, exit and stop-loss points for the handle.

Since most of the handles resemble an ear, it is sometimes used so, but informally. Therefore, Hold the cup by the ear or Take the cup by the ear can be acceptable in spoken contexts. Go long at the breakout from the handle pattern with a stop below the most recent low in the handle pattern. Target 2 – equals the vertical size of the cup applied at the moment of the breakout through the handle. The Cup with Handle pattern has its bearish equivalent, and is referred to as an Inverted Cup and Handle formation.

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The rally indicated by the cup shape shows re-investment in an asset that had become undervalued. Secondly, the price of the asset will stay at this stable point for a period of time. We recommend that you combine it with other tools like Fibonacci and indicators like moving averages. The price then started to decline and reached a low of $1050 in October 2015. As you can see below, the price of gold has been on a bullish trend for years.

Trading Cup And Handle Patterns

The cup typically takes shape as a pull back and subsequent rise, with the candlesticks in the center of the cup giving it the form of a rounded bottom. The handle is made up of downward-sloping price action that soon breaks out above the upper resistance line to indicate the continuation of the original bullish trend. Technical traders looking at stock prices over a longer time period will have no trouble spotting a cup and handle pattern.

  • The handle is made up of downward-sloping price action that soon breaks out above the upper resistance line to indicate the continuation of the original bullish trend.
  • We also reference original research from other reputable publishers where appropriate.
  • Use the smaller height and add it to the breakout point for a conservative target.
  • Once a cup and handle pattern forms, in order to generate a bullish trade signal, the price must break above the top of the handle that has formed.
  • The one thing to point out is that on the breakout, the stock used a lot of gas just to work its way through the cloud.
  • There are a couple of variations of the pattern, but they all have a similar look.

If institutions are holding on to the stock, it won’t fall too far. One point of clarification, you should not worry yourself trying to come up with exact measurements for your cup and handle pattern. This will only lead to a search for a needle in a haystack, which is a waste of time. If you’re day trading, and the target is not reached by the end of the day, close the position before the market closes for the day. 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.

Cup And Handle Pattern: What Does It Mean?

According to O’Neil’s description, the handle should extend no longer than between one-fifth to one-quarter of the cup’s length. This handle looks nothing like the ideal pattern but serves the identical purpose, holding close to the prior high, shaking out short-sellers, and encouraging new longs to enter positions. Note that a deeper handle retracement, rounded or otherwise, lowers the odds for a breakout because the price structure reinforces resistance at the prior high. A cup and handle is a technical chart pattern that resembles a cup and handle where the cup is in the shape of a “u” and the handle has a slight downward drift. Volume is a key indicator of pattern strength on both sides of the cup formation.

There are two variations of Cup and Handle chart patterns in Forex based on their potential. There is the bullish Cup with Handle and the bearish Inverted Cup with Handle. The cup-and-handle pattern is a stock trading pattern in which a share will lose value, only to regain it, briefly stabilize or even slightly decline before resuming growth.

Every book and blog you can find on the web will say to just sell once this one-to-one ratio is achieved. There isn’t a stock scanner setting you can use to find a cup and handle pattern, but the pattern Venture fund is easy to recognize visually. If you set your stock scanner to meet your other trading needs, then you can flip through the results until you find a chart that looks like a cup and handle.

cup and handle chart pattern

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. Other characteristics of the pattern that have to do with its shape are also important. For instance, the cup should be round rather V-shaped, as the former indicates consolidation whereas the latter is too sharp of a reversal from the high. The cup also should be relatively shallow – it should retrace only one-third to one-half of the prior uptrend. The handle can vary more in shape, but the downtrend should not retrace more than one-third of the gains at the end of the cup.

Is A Cup And Handle Pattern Bullish?

Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines. Also, the right side of the cup should always come nearer to the previous high point. Finally, the handle should move lower to about half of the top of the handle.

It was developed by William O’Neil and introduced in his 1988 book, How to Make Money in Stocks. Matching the previous peak, the stock’s volume will taper off. The share price will establish a new level of support that trades sideways for a short term . After the initial decline, the stock will find support as bears come back in to capitalize on the lower price. However, bears and bulls will battle at this level, causing sideways movement for a period of time . After peaking, the price of the stock will steadily trade downward after encountering selling pressure.

cup and handle chart pattern

Cup and handle patterns are found on all timeframes, from intraday charts up to weekly and monthly charts. To identify the cup and handle pattern, start by following the price movements on a chart. The pattern starts to form when there is a sharp downward price movement over a short time.

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A Pennant is basically a variant of a Flag where the area of consolidation has converging trend lines,… The handle should not drop into the lower half of the cup, and ideally, it should stay in the upper third. Find the approximate amount of currency units to buy or sell so you can control your maximum risk per position. Stay on top of upcoming market-moving events with our customisable economic calendar.

The two elements create a pattern, which resembles a cup with handle on the chart. The Cup and Handle is a chart pattern, which has a bullish potential. The confirmation of the pattern comes in at the green circle at the moment when the price action moves above the handle. You would typically look to buy the AUD/USD Forex pair when the candle closes above the handle. Now let’s demonstrate the bullish and the bearish Cup and Handle strategy in action.

How To Trade The Head And Shoulders Pattern

When trading this pattern, it is essential that you allow for the Cup and Handle Pattern’s construction to complete before trying to make any trades using it. If you do not do this, you stand the risk of having made an inaccurate call that could cost you a lot of money when the trade goes against you. There can be false signals or “False Cups and Handles” that give misleading information to traders. Even though the Breakout Trading Strategy is counted among the most reliable trading strategies out there, False Breakouts are not very uncommon.

Recent buyers see their small floating gain evaporate, and buyers at the bottom of the base fear a double top reversal. This is used in conjunction with the Stocks Over Coffee Podcast on Technical Education Cup with Handles. Apple is the largest company in the world with a market cap of 2 trillion. This is no easy feat to accomplish but is there a way to get into a small company before it becomes a household name?

That said, it matters more how the price moves after the cup and handle has formed that determines whether the price action​​ is likely to continue being bullish or moving in a higher direction. The cup and handle is considered a bullish signal, with the right-hand side cup and handle chart pattern 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. Chart Patterns are commonly leveraged by technical traders across all asset classes to predict the future movement in price trends.

Author: Jessica Dickler