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Cup And Handle Chart Pattern

  • By: Mike Davis, Esq.

If the resistance line at the top is broken, there is a good chance that a bullish breakout will ensue and the bullish trend will continue. This gradual and slow range is what will set the stage for the bullish trend to resume. People will think this is a double top which will trap some weak sellers when we finally break upwards. Chart patterns form when the price of an asset moves in a way that resembles a common shape, like a rectangle, flag, pennant, head and shoulders, or, like in this example, a cup and handle. Whenever you are looking at chart patterns and setups, try to think of things creatively. Try applying contradictory methodologies or trading indicators to see if you cannot unearth an edge.

Therefore, such Cup and Handle Patterns, where the cup of the pattern takes a V-shape are best to avoid as the trading signals generated by them are not very reliable. The Cup and Handle Pattern may seem like a simple chart pattern formed as a result of the herd mentality that exists in the capital markets. But, carefully reading this pattern may provide some very useful insights on the future price performance of the security that you are trading.

Subsequently, there’s a rally that is almost equal to the previous decline. A cup and handle chart may indicate either a continuation pattern or a reversal pattern. A reversal pattern can be seen when the price is in a long-term downtrend, then forms a cup and handle that reverses the trend as the price begins to rise. A continuation pattern on the Fiduciary other hand occurs when there’s an uptrend; the price rises and forms a cup and handle, and then continues to rise. If you look at the regular cup and handle pattern, there is a distinct ‘u’ shape and downward handle, which is followed by a bullish continuation. This means the inverted cup and handle is the opposite of the regular cup and handle.

cup and handle reversal

Both rectangles and price channels appear in virtually all forex charts. Grow the position by adding new orders if the breakout expands and shows strength. With this technique, the profit is realized only when the trend pulls back enough to trigger the stop losses. Now that we know what is Cup and Handle, let’s walk through the trading rules of the Cup and Handle trading strategy that can set you apart from the rest of the crowd. The handle portion is a retracement downwards from the right side of the cup.

Tips From The Trading Desk

The structure of the “Cup” portion of the pattern reveals important information with regards to the market’s interaction with the asset. This is because the Cup of the pattern can take several different shapes depending on the relative duration over which it is formed. Following this, the price of the security starts to rise again. Geometrically speaking, this upward slope of the price move is symmetrical and roughly a mirror image to the downward price slope during the initial phase of pattern development. Monero could be in the final stages of forming the handle for the cup.

The decrease could stop a bit before the midpoint, or could go a bit below. Please see the further, important disclosures about the risks and costs of trading, and client responsibilities for maintenance of an account through our firm, available on this website. In both scenarios, the context is very different, but the pattern is the same, and can be traded in exactly the same way. You can watch the video on the pre-breakout as I believe it’ll answer your question. If you’re entering on the 4-hour timeframe, then a factor of 6 would be, 4 multiply by 6, which gives you 24 hours, and that’s the daily timeframe.

The price reached an all-time high of $1920 on September 2011. The entry should be placed above the break of the horizontal resistance (3.), preferably on an increased volume. The entry should be placed bellow the break of the horizontal support (3.), preferably on an increased volume. An up-trend that stalls while volume remains high is a sign that distribution is taking place.

cup and handle reversal

As with most forms of technical analysis, symmetrical triangle patterns work best in conjunction with other technical indicators and chart patterns. Traders often look for a high volume move as confirmation of a breakout and may use other technical indicators to determine how long the breakout might last. For example, the relative strength index may be used to determine when a security has become overbought following a breakout. The breakout should occur on high trading volume and continue above the trendline drawn from the left to the right side of the cup to provide confirmation. On forex charts, the bullish version of this exchange rate formation resembles a rounded bottom or cup on the left with a shallower handle to the right. The bottom of the cup should be clearly rounded, and V shaped bottoms typically do not qualify.

Grid Trading Guide

The cup and handle pattern is a pattern that traders use to identify whether the price of an asset will continue moving upwards. As the name suggests, the pattern is made up of two sections; a cup and handle. The pattern ends when the handle reaches the same level as the highest point of the cup.

It was developed by William O’Neil and introduced in his 1988 book, How to Make Money in Stocks. Inverted cup and handle patterns can be identified by their large crescent shape followed by a less extreme, upward retracement. The entire pattern usually takes within 3 to 6 month to develop. These patterns are meant to serve as being indicative of a bearish reversal. A cup and handle is a bullish technical price pattern that appears in the shape of a handled cup on a price chart.

A diamond top is formed when a price trend begins to widen and then narrows. A diamond bottom is formed when a price trend begins to widen and then narrows. An descending triangle is formed when support remains flat as resistance drops.

cup and handle reversal

Wynn Resorts, Limited went public on the Nasdaq exchange near $11.50 in October 2002 and rose to $164.48 five years later. The subsequent decline ended within two points of the initial public offering price, far exceeding O’Neil’s requirement for a shallow cup high in the prior trend. The subsequent recovery wave reached the prior high in 2011, nearly four years after the first print. The handle follows the classic pullback expectation, finding support at the 50% retracement in a rounded shape, and returns to the high for a second time 14 months later. The stock broke out in October 2013 and added 90 points in the following five months. The subsequent decline ended within two points of theinitial public offering price, far exceeding O’Neil’s requirement for a shallow cup high in the prior trend.

Use Volume And Emotion To Tackle Topping Patterns

A large range with low volume indicates a lack of interest from sellers or buyers . This pattern is likely to appear when the market is in an indecisive phase as a rally pauses and consolidates. Buyers are taking a wait and see approach, but there is not enough selling volume to push the price https://www.bigshotrading.info/ to a deeper correction. The cup should be roughly symmetrical with the two sides of the pattern at nearly the same level. The handle part is a smaller, usually about one third to one quarter of the size of the cup. The handle should not dip below about fifty percent of the depth of the cup.

  • When this part of the price formation is over, the security may reverse course and reach new highs.
  • An ‘inverted cup and handle’ is a chart pattern that indicates bearish continuation, triggering a sell signal.
  • Let’s walk through a few chart examples to illustrate the trading strategy.
  • In fact, in most cases, the Handle would not exceed beyond one-third of the distance between these two points.
  • When looking at a regular cup and handle pattern, you’ll notice a distinct ‘u’ shape and downward handle, which is followed by a bullish continuation.
  • There are three equal lows followed by a break above resistance.

Many cup and handle traders adhere strictly to O’Neil’s rules for construction, but there are many variations that produce reliable results. In fact, modified C&H patterns have applications in all time frames, from intraday scalping to monthly market timing. Kirkpatrick & Dahlquist state that typically volume decreases on the left side of the cup and then increases on the right side of the cup (2010, p. 325). Rectangles are continuation patterns that occur when a price pauses during a strong trend and temporarily bounces between two parallel levels before the trend continues.

Lastly, illiquidity also restricts the cup and handle from fully forming as trading volume also affects an asset’s price. As a general rule, cup and handle patterns are bullish price formations. The founder of the term, William O’Neil, identified four primary stages of this technical trading pattern. First, approximately one to three months before the “cup” pattern begins, a security will reach a new high in an uptrend. Second, the security will retrace, dropping no more than 50% of the previous high creating a rounding bottom. Third, the security will rebound to its previous high, but subsequently decline, forming the “handle” part of the formation.

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.

Market volatility is an important parameter that in a way helps determine how risky a potential investment might be. In essence, being able to see the volatility of the asset will allow you to assess whether the market fits into the risk profile that you are comfortable with. Therefore, it is an important parameter that you must consider as part of your overall investment and trading strategy.

What Is Cup And Handle?

The right side of the handle rises higher than the left and the pattern slightly overestimates the extent of the bullish continuation after the breakout. Cup and handle patterns typically are seen to occur on a daily chart after a strong trend has progressed for one or more months. As a trend matures, the chances that the cup and handle forms decrease, while any cup and handle that does form is likely to produce a smaller continuation movement with less upside potential. The rounded part is the Cup and the small bearish channel is the handle. The confirmation of the formation is illustrated with the small green circle when the price action breaks the handle downwards.

How To Identify The Cup And Handle Pattern

The buy point occurs when the asset breaks out or moves upward through the old point of resistance . A rising wedge is generally considered bearish and is usually found in downtrends. They can be found in uptrends too, but would still generally be regarded as bearish.

This depth can then be added to the breakout point to find the projected price that should be reached as a minimum price target for this pattern. As the cup is completed, price trades sideways, and a trading range is established on the right-hand side and the handle Financial leverage is formed. When you are day trading cup and handle patterns, you must realize that not all handles are created equally. The funny thing about the formation is that while the handle is the smallest portion of the pattern, it is actually the most important.

Contrarily, in a downtrend, the pattern signals a potential reversal. By appearance, the pattern resembles a teacup with a handle and is accordingly named. The pattern forms during as a result of consolidation a bullish movement and indicates a continuation of that bullish trend after its completion. Rims – ideally relationship 1st – 2nd support efforts will offer the trader an advantage before the break.

Hence, we don’t hear people talking about “bullish cup and handle” or “bearish cup and handle”, because when they say “cup and handle”, it is understood to refer to the bullish version. 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.

Check out this step-by-step guide to learn how to scan for the best momentum stocks every day with Scanz. Here’s how you can use Scanz to find the top movers every single day. To be sure that this is indeed a falling wedge and a reversal is about to happen, watch volume, as it should be increasing.

Author: Julia La Roche

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