Stop-loss orders may be placed either below the handle or below the cup depending on the trader’s risk tolerance and market volatility. There are several ways to approach trading the cup and handle, but the most basic is to look for entering a long position. The image below depicts a classic cup and handle formation.

But merely identifying the cup and handle chart pattern is not enough to profit. Rather, you must also know exactly when to buy for ideal, low-risk entry points. Like all technical indicators, the cup and handle should be used in concert with other signals and indicators before making a trading decision.

• The candles of the handle should have small bodies and in a very tight range.
• More than 15% below the high is too deep, and increases the odds of pattern failure.
• The first step is to identify an uptrend and a rounded retracement into that bullish trend.
• Plot the extension from the base of the cup to the start of the handle, then to the handle’s low.

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. The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout.

There are several advantages of trading the Cup and Handle pattern. Markets are unpredictable, and sometimes the opposite of what you expect happens. Traders rely on a stop-loss order to get them out of a trade in such situations. Before reading the article and writing your questions in the comments section, I recommend to watch this video. It’s not long but covers the biggest part of questions on the topic.

Most of the same general rules, such as the https://en.forexbrokerslist.site/ not exceeding 1/3rd of the cup, still apply. The price of the asset is expected to drop after the pattern formation is complete. If the cup and handle form after a downtrend, it could signal a reversal of the trend. To improve the odds of the pattern resulting in an actual reversal, look for the downside price waves to get smaller heading into the cup and handle. The smaller down waves heading into the cup and handle provide evidence that selling is tapering off, which improves the odds of an upside move if the price breaks above the handle.

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A stop-loss can be placed below the low price point in the handle. You can use derivatives such as CFDs or spread bets to trade when you see the cup and handle pattern. With derivatives trading, you don’t own the underlying asset, which means you can go long or short . Commentary and opinions expressed are those of the author/speaker and not necessarily those of SpeedTrader. SpeedTrader does not guarantee the accuracy of, or endorse, the statements of any third party, including guest speakers or authors of commentary or news articles. All information regarding the likelihood of potential future investment outcomes are hypothetical.

SpeedTrader receives compensation from some of these third parties for placement of hyperlinks, and/or in connection with customers’ use of the third party’s services. SpeedTrader does not supervise the third parties, and does not prepare, verify or endorse the information or services they provide. SpeedTrader is not responsible for the products, services and policies of any third party. Now, let’s revisit the same chart using the logic of selling the supply or upper resistance line on the chart. The candles of the handle should have small bodies and in a very tight range. IBD Videos Get market updates, educational videos, webinars, and stock analysis.

Protect Your Trade With a Stop-Loss

The handle can be a small consolidation or slight pullback. The chart below shows how a cup and handle pattern look like. Some years ago, Jay Kaeppel published an article about retail seasonalities…. It forms after a price rally, and its depth should be 30-50% of the rally preceding it.

Then understand the psychology behind this profitable trading pattern. Our team at Trading Strategy Guides is working hard to develop the most comprehensive guide on different chart pattern strategies. In order to understand the psychology of a chart pattern, please start here, Chart Pattern Trading Strategy step-by-step Guide. If you’re not ready to start straight away, you can practise your trades on a risk-free demo account.

A stop-loss order is then placed above the handle and a profit target is calculated by the height of the cup subtracted from the handle breakout point. Alternatively, traders could double the size of the handle and subtract that from the handle breakout point. This is an inverted form of the cup and handle pattern that forms in a downtrend.

Graphical representation of a cup with handle pattern

The https://forex-trend.net/ is a bullish continuation formation that marks a consolidation period, with the right-hand side of the pattern typically experiencing lower trading volume. The cup part of the pattern forms after a price rally and looks like a gradually rounded bottom of a bowl. It is a bullish continuation pattern which means that it is usually indicative of an increase in price once the pattern is complete.

The rounded bottom really shows the buyers are in control and thus new highs should be expected. Each of the two key components, the cup and the handle, triggers specific crowd behavior. The bottom of the pattern will dip about 15% to 50% from the peak. If you drop lower than 50% from the peak the pattern is invalidated .

Nevertheless, notice how once the handle completed and the stock sky rocketed off, the area around the cloud acted as support prior to the move up. So far, in this article, we have only highlighted when the cup and handle produced stellar results. Well guess what folks, sometimes it’s not always sunny outside. As you can see from the above example, the cup is really a rounding of price action near a series of lows.

The pattern has better odds if it’s a growth stock in a strong sector that has increasing revenue and earnings growth expectations. We always recommend you to backtest first the pattern and trade it a few times on a demo until you’re comfortable and have a good understanding of how to trade this setup. First buy entry on the Handle breakout, the upper line that defines the Handle structure is our trigger line of the first buy order. The handle portion is a retracement downwards from the right side of the cup. IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority. All investing involves risk, including loss of principal invested.

Basing refers to a consolidation in the price of a security, usually after a downtrend, before it begins its bullish phase. Samantha Silberstein is a Certified Financial Planner, FINRA Series 7 and 63 licensed holder, State of California life, accident, and health insurance licensed agent, and CFA. She spends her days working with hundreds of employees from non-profit and higher education organizations on their personal financial plans. The phrase “bear trap” sounds dangerous and causes anxiety.

As a general rule, https://topforexnews.org/ 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. Finally, the security breaks out again, surpassing its highs that are equal to the depth of the cup’s low point.

The cup and handle pattern is a common method you can use to analyse the trend of assets. You can use it to analyse stocks, currencies, bonds, commodities, and index funds among others. Third, it shows you the potential level to watch out when the price experiences a bullish breakout. Most brokers measure the length between the highest point of the resistance and the lowest level of the cup. You can see the cup and handle pattern that formed between 2005 and 2007.

This is when the pattern forms a handle inside a trading range. The second run at new highs usually works as the majority of sellers have been worked through and the stock breaks out to new highs. Thecup and handle pattern is a bullish continuation pattern. This pattern gives a momentum buy signal as price action breaks out of the handle in the formation. It was originally intended to be used with high growth stocks within the‘CAN SLIM’ system.

The cup and handle pattern occurs when the price of an asset trends downward, followed by a stabilizing period. Prices then rise to an approximately equal size to the prior decline. It creates a U-shape or the “cup” in the “cup and handle.” The price then moves sideways or drifts downward within a small price range, forming the handle. A rounding bottom is a chart pattern used in technical analysis that is identified by a series of price movements that graphically form the shape of a “U.”

How to Trade Cup and Handle Patterns

This is a very reliable trading pattern and works very well. There are not perfect setups, so you will need to practice strong trade management in order to earn profits in the strategy. You never want to over risk because no strategy will win 100% of the time.