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. Whatever the height of the cup is, add it to the breakout point of the handle. For example, if the cup forms between $100 and $99 and the breakout point is $100, the target is $101. You’ve identified a cup and handle pattern, but before you jump into the trade, you must wait for a handle to form completely. The handle often takes the form of a sideways or descending channel or a triangle pattern.
At the same time, longs chasing the breakout watch a small profit evaporate and are forced to defend positions. Both groups are now targeted for losses or reduced profits, while short-sellers pat themselves on the back for a job well done. 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 practice your trades. This information has been prepared by IG, a trading name of IG Markets Limited. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information.
We explore the cup and handle pattern, as well as the inverted cup and handle, and show you how to trade when you recognise these patterns. O’Neil liked a downward handle as opposed to an uptrending handle. His backtesting showed uptrending handles often lead to cup and handle pattern failure.
What happens after a cup and handle pattern?
If a cup and handle forms and it is confirmed, the price should see a sharp increase in the short- to medium-term. If the pattern fails, this bull run would not be observed. There is a risk of missing the trade if the price continues to advance and does not pull back.
Please be advised that your continued use of the Site, Services, Content, or Information provided shall indicate your consent and agreement to our Terms and Conditions. If you do not agree with any term of provision of our Terms and Conditions you should not use our Site, Services, Content or Information. This is the point where the price reverses and begins to move in a bearish direction. Note that you have the option of closing your trade immediately you reach your second target, that is, Target 2.
- The idea behind the Cup and Handle pattern is to trade the breakout when the price breaks above the “handle”.
- It’s also important to keep in mind that the cup and handle pattern is not a perfect indicator.
- That rounded bottom is the first component you need to see.
- Rather, you must also know exactly when to buy for ideal, low-risk entry points.
- But the cup and handle pattern has a long history and was discovered by the famous trader, William J. O’Neil.
The bottom of the cup is a stabilizing period where the price moves sideways. This means that the price found a good support level that it couldn’t drop below for some time. That can provide traders with a strong point to set a stop loss. The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. It was developed by William O’Neil and introduced in his 1988 book, How to Make Money in Stocks.
Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. 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. This is useful when trading both the cup and handle and the inverted cup and handle, because you can speculate on upward or downward price movements.
You could also use the larger height for an aggressive target. And you gotta check out our brand-new Breaking News chat feature. See how two skilled stock market pros can help you find the news with the most potential to move stocks. Here’s where you can learn more and start a 14-day trial TODAY.
Cup and Handle Pattern Examples
The round shape indicates consolidation, and that’s a good thing. If the cup is in a V-shape, the reversal will be too sharp of a movement. One of its limitations is the ambiguity of the pattern formation.
Also, remember smart trading requires more than just knowing a pattern. I’ve given you hints in this post about how to trade the cup and handle pattern. But if I gave you only “buy here, sell here” I’d be doing you a great disservice. So I don’t go on the hunt for the cup and handle pattern. But — and this is super important — a lot of traders do. You can see the cup and handle pattern that formed between 2005 and 2007.
How to Trade the Cup and Handle
During the stock’s actual breakout, you want to see a new wave of buyers coming in at a torrid pace, not a trickling one. Proper handle length – The ideal length of the handle is 3 to 4 weeks. At a minimum, the handle should be at least 5 days long. The handle should also be less than two-thirds the length of the cup below it. If the stop-loss is below the halfway point of the cup, avoid the trade. Ideally, it should be in the upper third of the cup pattern.
Let’s get into the https://business-oppurtunities.com/ and handle pattern as defined by William O’Neil. The sad thing is that the pattern was sound, but the profit target literally looks like you are recreating shelves in my kitchen. It just doesn’t make sense to me to set your targets this way. 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.
During bear markets, some good cup-with-handle bases show a large decline within the handle. But again, it should not exceed the drop within the cup. Double bottoms and saucers also can have handles, but they are less common. The price drop in a proper handle should be within 12% of its peak. Make sure it doesn’t exceed the cup portion in time or size of decline.
Stop-loss orders may be placed either below the handle or below the cup depending on the trader’s risk tolerance and market volatility. 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.
Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. It’s important to note that the cup should be round rather than V-shaped. The pattern failed at first … but ended up completing the pattern three days later. Expert market commentary delivered right to your inbox, for free. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
The the work at home revolution should produce significant volume and price expansion. Any who, as the price approaches the creek or top of resistance, the stock will have a minor pullback, thus creating the handle. Once this pullback or handle is complete, we are off to the races. Sign up for Market Minutes to receive powerful market analysis, top trade ideas, & helpful blog updates. Proper technical analysis puts the odds of winning in your favor, but you must always be prepared to cut your loss if the pattern fails. Then, you can add the rest of your position size after receiving confirmation of the handle breakout.
If you’re entering on the 5-minute timeframe, then a factor of 6 would be, 5 multiply by 6, which gives you the 30-minute timeframe. And usually, you exit your trades just before the opposing pressure steps in. If it doesn’t, then chances are it’s in a range or about to reverse lower.
The Inverted Cup and Handle is the bearish version that can form after a downtrend. TradingView has a smart drawing tool that allows users to visually identify this pattern on a chart. A Cup and Handle can be used as an entry pattern for the continuation of an established bullish trend. The cup has a soft U-shape, retraces the prior move for about ⅓ and looks like a bowl.
However, it can decline as well, which is why a stop-loss is needed. The cup and handle indicator has been used by traders to determine the direction in which an asset/stock may move. It also defines the entry point, stop-loss, and target placement guidelines. To figure out the profit target when trading a cup and handle pattern, compare the price at the bottom of the cup to the price at the start of the handle.
Watch for price to hold the bottom of the upside down cup and form handle formation. The pattern is confirmed when the price action breaks out of the handle. After the formation of the cup, the price action made a bullish move. The above chart shows how to apply targets to the bullish cup and handle.
Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. Stay on top of upcoming market-moving events with our customisable economic calendar. I’m extremely determined to create a millionaire trader out of one my students and hopefully it will be you. The syllabus takes you from complete newbie through all the strategies I teach. Both the Cup and Handle pattern and the inverse type tell a similar story about the market but from different perspectives .
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. This is followed by a period where the price remains relatively stable.