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Cup and Handle chart pattern Best guide with 2 examples!

Cup and Handle chart pattern Best guide with 2 examples!

cup handle chart
cup handle chart

The pattern is used to analyze the price movement of a security, and it provides useful information about the direction of price movements in the future. In this article, we will delve into the anatomy of the cup and handle pattern, its identification, trading strategies, as well as its advantages and limitations. A cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities. Hence, by looking for divergence on the price chart of the security that you are trading, you can sizably improve the reliability of trading decisions. Chart Patterns are commonly leveraged by technical traders across all asset classes to predict the future movement in price trends. One prominent chart pattern that traders use is the Cup and Handle Pattern.

The first take profit target should be located at a distance that is equal to the size of the handle. This acted as a confirmation of the bearish cup and handle pattern. After the formation of the cup, the price action made a bullish move. After the formation of the cup, the price action begun a new bearish move. The rounded structure created by this price movement forms the Cup portion of the pattern. The next way to trade the pattern is to wait for a break and retest.

cup handle chart

You can also see that the two targets have been applied from the moment of the breakout. A bullish move begins, which moves to approximately the same level as the top of the bearish move. It begins with a price move in the bearish direction, which reverses gradually.

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While the price is expected to rise after a cup and handle pattern, there is no guarantee. The price could increase slightly and then fall; it could move sideways or fall right after entry. The cup and handle price pattern has its bearish equivalent known as the Inverted cup and handle formation.

  • If the trend is up and the cup and handle form in the middle of that trend, the buy signal has the added benefit of the overall trend.
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  • The rounding support level takes price back to resistance, where there is yet another pullback forming the handle.
  • As such, it is important to confirm cup and handle patterns with other technical indicators to increase the probability of success.

The cup and handle tells you that the price will continue with its bullish trend. It also tells you where to expect the initial resistance level. This resistance happens at the level where the price reached and started falling. If a cup and handle forms and it is confirmed, the price should see a sharp increase in the short- to medium-term.

How to Draw the Cup and Handle Pattern

A correction forms a rounded bottom, taking the shape of a cup. A handle then forms on the right side of the cup pattern at about half of the cup’s height. When this part of the price formation is over, the stock may reverse the course and resume the prior uptrend. The Cup portion of the chart pattern is U-shaped and shallow relative to the price trend that preceded it.

cup handle chart

You can see the cup and handle pattern that formed between 2005 and 2007. Many skills are required for trading successfully in the financial markets. They include the abilities to evaluate a company’s fundamentals and to determine the direction of a market trend. But neither of these technical skills is as important as the trader’s mindset.

Cup and handle chart patterns can last anywhere from seven to 65 weeks. 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. If you want to draw a bearish cup and handle chart pattern, take the two bottoms of the pattern then stretch a curved line upwards. If you want to draw the bullish cup and handle chart pattern, take the two tops of the cup and stretch a curved line downwards. In this article, I will help you learn how to trade the cup and handle chart pattern more effectively.

Lastly, illiquidity also restricts the cup and handle from fully forming as trading volume also affects an asset’s price. The cup pattern in trading forms after an initial uptrend. 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 pattern is a popular technical charting pattern used by traders to make informed investment decisions.

However, to the eyes of a novice or less experienced trader, identifying this pattern is no easy feast. Of course, keep in mind that the cup and handle pattern can fail, so always use stops. Don’t risk more than 7% to 10% below your entry price—even less with an early entry point.

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Financial data sourced from CMOTS Internet Technologies Pvt. Technical/Fundamental Analysis Charts & Tools provided for research purpose. Please be aware of the risk’s involved in trading & seek independent advice, if necessary. This is for informational purposes only as StocksToTrade is not registered as a securities broker-dealeror an investment adviser. Even if you don’t plan on using it, it’s popular with a lot of traders. That means it can become a self-fulfilling prophecy when enough traders see it forming.

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. Chart patterns look good for a short trade in Reliance industries REASONS 1. RELIANCE has been trading inside an Ascending Channel and currently it is down under its Downswing move inside the channel 2. There is a Monthly breakdown out of a 5 year old trendline support Monthly timeframe chart below – 3.

Using the measure tool, users can also find the target of the pattern. Cup and handle trading is easy thanks to the built-in technical analysis tools at the Margex margin trading platform. Margex offers up to 100x leverage and long and short positions on cryptocurrencies like Bitcoin, Ethereum, and Litecoin. We should avoid handles that are overly deep also, as handles should not exceed 50% depth of the cup. The best cup and handle patterns have a shallow retracement on the handle (not more than 1/3 of the cup). However, in some situations, the price may retrace up to 0.618 Fibonacci level.

If you can see what other traders are seeing and determine how they are thinking, you can make smarter decisions and trade more effectively. It’s important to note that the cup should be round rather than V-shaped. The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Traders use this indicator to find opportunities to buy securities with the expectation that their price will increase.

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The pattern was first defined by author and analyst William J. O’Neil in his 1988 book How to Make Money in Stocks. Therefore, to compensate for this weakness, you may benefit from adding a volatility measuring indicator to your chart pattern trading strategy. When the Cup is rounded or U-shaped, it indicates that a consolidation is possible.

In the first part of the formation, the sellers overpower the buyers… A good time to buy is when the price of the asset moves up and exceeds the price levels seen previously at the top of the right side of the cup. That means the asset’s price, which is trending lower to form the handle, should not drop to level of the lower half of the cup. Ideally, the price should stay within the top 1/3rd of the height of the cup. As you can see, the price action managed to reach both profit targets. The above chart shows how to apply targets to the bullish cup and handle.

Proper handle length – The ideal length of the handle is 3 to 4 weeks. The handle should also be less than two-thirds the length of the cup below it. Light volume – Volume should dry up at some point near the bottom of the base of the cup. This indicates the sellers are gone and enables the bulls to resume control. At Ablison.com, we believe in providing our readers with useful information and education on a multitude of topics.

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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 cup handle chart a short time. This is followed by a period where the price remains relatively stable. Then, there is a rally that is more or less equal to the initial decline.

Master the Cup and Handle Pattern: Simple 10-Step Checklist for Profitable Trading

It marks a slightly downward or sideways price movement and then an uptrend that pushes past the resistance level causing a breakout. A cup and handle pattern is a technical chart pattern signalling a bullish continuation in a security’s price movement. It is a prediction that the security’s price will move upward following a breakout.

Several things can help you identify this bullish continuation pattern, particularly the shape of the chart pattern. Infoedge the owner of Zomato has been consolidating for 7 months. A stop-loss order gets a trader out of a trade if the price drops, instead of rallying, after buying a breakout from the cup and handle formation.

As we have stated above, the best time to enter or open a trade is when the pattern has been confirmed. See that the target has been applied downwards from where the breakout occurs. 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. This bullish price move slows down gradually and eventually becomes bearish.

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