However like any tool, in the hands of the inexperienced, it can be dangerous. Using O’Neil’s CANSLIM approach, the buy region is very narrow, and very strict buy and sell disciplines are absolutely mandatory to be successful using this approach. One must wait until a stock breaks above its pivot point, and that breakout must be accompanied by sufficient volume. The combination of these two requirements often restricts the timeframe during which a stock can be bought to a single day or even a short window within a day. Now that we have covered a short introduction to the cup and handle pattern, let’s walk through a few day trading strategies that can separate you from the crowd. At this point, the cup and handle chart pattern will be evident.
Markets such as forex, commodities, and cryptocurrencies, which are favored by technical traders, can also see breakouts. A stock breakout is a tradable event that you can base your entire strategy around. A breakout is simply when a stock or stock index moves beyond a level of resistance and support that it has struggled to move above or below in the past. Therefore, a breakout stock is a share that moves beyond its support or resistance level. By later in the same month, an extremely tight range develops above the 20-day exponential moving average. However, notice the price action never really broke below the 50-day moving average for more than a few days.
What Is A Cup And Handle?
The target can be estimated using the technique of measuring the distance from the right peak of the cup to the bottom of the cup and extending it in the direction of the breakout. A common stop level is just outside the handle on the opposite side of the breakout. The Inverted Cup and Handle is the bearish version that can Japanese yen form after a downtrend. TradingView has a smart drawing tool that allows users to visually identify this pattern on a chart. The daily and weekly charts at both Investors.com and MarketSmith make heavy turnover easy to spot. Simply compare the day or week’s volume with the moving average line drawn across the volume bars.
Estimating the extent of the continuation movement by measuring the distance between the base of the cup and the breakout slightly underestimated the movement. 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. After forming the cup, price pulls back to about ⅓ of the cups advance, forming the handle. The full pattern is complete when price breaks out of this consolidation in the direction of the cups advance. A cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities.
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Those equities are nearing their previous highs and forthcoming consolidation would serve as an excellent buying opportunity prior to an explosive breakout. The ideal profit target for the Cup and Handle trading strategy would be equal to the same distance in price as measured from the initial Cup peak to the bottom of the Cup. Now that we learned what a Cup and Handle pattern is, it’s time to look beyond the price action. Then understand the psychology behind this profitable trading pattern. This can be the same when reading the price action for the Cup and Handle formation. At TSG, we believe the Cup and Handle is one of the most authentic continuation patterns.
The shape is formed when there’s a price wave down, which is then followed by a stabilization period, followed again by a rally of approximately the same size as the prior trend. This price action is what forms the identifying cup and handle shape. Cup and handle patterns form as the result of consolidation after an uptrending stock tests its previous highs. At that level, traders who bought the stock near the previous highs are likely to sell, causing a gentle pullback. This pullback is then met with bullish activity, which causes the rounded bottom and rise of the right side of the cup. A Cup and Handle pattern is a bullish continuation pattern that resembles a teacup on a candle chart.
The longer and rounder the bottom, the stronger the signal. Lastly, illiquidity also restricts the cup and handle from fully forming as trading volume also affects an asset’s price. CONCLUSIONS These examples demonstrate the usefulness of computerized screening methods when quantifiable chart patterns and a large database of stocks cup and handle pattern are available. Computerized screening can be an excellent and efficient tool in the trader’s arsenal. Like any other tool, however, it can be dangerous in the hands of the inexperienced. Using the CANSLIM approach, the buy region is very narrow, and strict buy and sell disciplines are mandatory to be successful using this approach.
How Much Does Trading Cost?
To draw this pattern, you need to place a horizontal line on the resistance points and draw an ascending line along the support points. The cup forms after an advance and looks like a bowl or rounding bottom. As the cup is completed, a trading range develops on the right-hand side, and the handle is formed.
Although not a perfect substitute for the human eye and mind, computerized screening can be an excellent and efficient tool in the trader’s arsenal. In the above chart example, you can see how the stock made a nice round cup and had a strong handle, before continuing higher. 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.
- Order execution should only occur if the price breaks the pattern’s resistance.
- You can use our pattern recognition software to help inform your analysis.
- There are a couple of variations to this pattern that crypto traders need to be aware of.
- As the cup is completed, a trading range develops on the right-hand side, and the handle is formed.
- To find the price target, one measures the distance from the top to the bottom of the cup and then adds the distance to the top of the cup.
There aren’t a lot of fancy indicators or technical tools needed to spot the pattern. One of the characteristics of the cup and handle pattern is that the handle must form within 10% of the old high. There are times when the market is extremely bullish and the handle pushes slightly above the old high but remains within 10% of it.
Cup And Handle
In general, the right-hand side of the diagram has low trading volume, and it can last from seven weeks up to around 65 weeks. Chart patterns work by representing the market’s supply and demand. This causes the trend to move in a certain Financial market way on a trading chart, forming a pattern. However, chart pattern movements are not guaranteed, and should be used alongside other methods of market analysis. Chart patterns can be identified on our chart pattern screener tool.
It was developed by William O’Neil and introduced in his 1988 book, How to Make Money in Stocks. Besides, you shouldn’t act too fast on every piece of information you receive. Take the time to scan for potential breakout candidates and use chart patterns to weed out any weak prospects.
How Long Does It Take To Form?
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. As with most chart patterns, it is more important to capture the essence of the pattern than the particulars. The cup is a bowl-shaped consolidation and the handle is a short pullback followed by a breakout with expanding volume.
What is an ABAB pattern?
Users can manually draw and maneuver the five separate points (XABCD). The XABCD points create four separate legs, which combine to form chart patterns. The four legs are referred to as XA, AB, BC, and CD. Each of the five points (XABCD) represent a significant high or low in terms of price on the chart.
William O’Neil initially recognized this popular stock chart pattern in 1988. To identify the cup and handle formation O’Neil claims the handle should extend no longer than one-fifth to one-quarter the length of the cup. The handle will remain close to the prior highs, which will squeeze out the short-sellers and cause new buyers to enter the market. With a computer program that screens for such patterns, the user is provided a list of stocks whose charts are the best cup-with-handle candidates on a purely technical basis. It is then up to the user to research these stocks to determine which have the qualifying fundamental criteria. The user must not buy stocks from the list yet, as many stocks which complete the cup with handle set up, do not break out.
If it is almost ready to pop, I keep it on a notepad in front of me and also add it to my chart windows that are always open on my computer. That way I can watch it every day to see if it sets up fully. Finally, when the price breaks out of Resistance, the cup and handle pattern is “confirmed”, and the market could move higher. This is a powerful chart pattern that’s used by stock traders to capture explosive breakout moves — where the stock price could increase 1000+% within a few years.
Use the smaller height, and add it to the breakout point for a conservative target. To indentify peaks and troughs, we can use a smoothing function like moving average. Commodity and historical index data provided by Pinnacle Data Corporation.
As a day trader, if you don’t reach the target by the end of the day, you should close the position before the market closes. You can also use a trailing stop-loss to get out of a position to move close to the target. You shouldn’t place stop-losses within the upper half of the cup.
The price projection for the cup and handle pattern can be calculated by measuring the depth of the cup, i.e., from the peaks at the top of the cup to the bottom of hte cup. 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. The Handle is a trading range or a consolidation area that develops after the Cup is completed.
However, if the broad market is in a bearish trend, then a bullish breakout is less likely to occur. To trade the cup and handle pattern, wait for technical levels of resistance to break. There are two areas where traders can buy the resistance break.
Once this pullback or handle is complete, we are off to the races. That’s why we designed StocksToTrade to have such incredible, easy-to-customize charts. You can add in lines for support or resistance, use technical indicators, easily export to review later, and so much more. I often tell new traders to study charts until their eyes bleed. That’s a bit of an exaggeration, but I want every trader to understand how much a chart can tell you. If the pattern is successful, there’s a good chance for another breakout after the stock passes the cup’s previous high.
I typically do my scanning in the evening, after the stock market has closed. I may run a scan during the day if I’m going to be busy in the evening. I typically run a scan once a week, but it could be done daily, or a few times a month.
Reviewed by: Dori Zinn