IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. Below is an example of an inverted cup and handle on the FTSE 100 weekly chart. Although the pattern formed and the price did decline, ultimately, the price did not follow through to the downside. The Big Tech share basket chart provides an example of this. Prior to the decline that started the cup and handle pattern, the price had advanced about 30% over several months.
First, it is a relatively easy pattern to identify in a chart. Second, you don’t need to use any technical indicators like the RSI and moving averages. Many investors that bought shares near all-time highs before the left side of the cup was formed are looking to recoup their lost money. The handle shakes out weak shareholders before the real move happens.
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Of course the pattern has its bearish equivalent, the Inverted Cup and Handle, which we will touch upon later as well. The power of a Cup and Handle lies in the fact that after hitting overhead resistance from the prior swing high, a very minor correction is put in. The stock then breaks out past resistance which can be a sign that demand for the security may be increasing. A good example of cup and handle pattern at work is to look at the long-term chart of gold. Watch for price to reject top of the cup and form handle formation.
Volume ideally drops off during the consolidation, or has at least one or more really low volume days . Price moves up again and forms a consolidation Over-the-Counter in the middle to upper portion of the triangle . If the consolidation is taking up most of the triangle, which is now quite narrow, that is also fine.
It occurs when there is a price wave down, followed by a stabilizing period, followed by a rally of approximately equal size to the prior decline. It creates a U-shape, or the “cup” in our “cup and handle.” The price then moves sideways or drifts downward within a channel—that cup and handle chart pattern forms the handle. A cup and handle is a technical indicator where the price movement of a security resembles a “cup” followed by a downward trending price pattern. This drop, or “handle” is meant to signal a buying opportunity to go long on a security.
The confirmation of the pattern comes when the price action breaks the channel of the handle in the bearish direction. The first target of the pattern equals to the size of the bearish channel around the handle, applied downwards starting from the moment of the breakout. The second target equals to the size of the cup, applied downwards starting from the moment of the breakout. It gets its name because it resembles a cup with a handle in appearance. It forms a handle in the upper portion of the cup but below the prior high. Once the price starts forming a handle we wait for a consolidation .
How Do You Find A Cup And Handle Pattern?
The cup and handle pattern gets its name because it looks exactly like that. Watch our video above to learn more about cup and handles.Patterns, like the c & h pattern, are such an important part of trading. Shares and stock indices with lots of upward momentum prior to the cup and handle forming tend to produce the most favourable cup and handle patterns for trading. In this case, traders may focus on stocks or indexes that saw strong percentage advances heading into the cup and handle pattern. The price will likely continue in that direction though conservative traders may look for additional confirmation. 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.
- The cup and handle pattern is a bullish continuation pattern.
- You may not want to completely exit the trade, where the price move is having more potential to increase the profit of your trade.
- You could hold the trade as long as the price action is located above the yellow bullish trend line.
- An order allows you to open a position at a price you choose, rather than the one currently being quoted.
This was a relatively long handle, but once it had finished, Ethereum rallied on increasing volume. After rallying 300% to begin 2021, Ethereum began consolidating the uptrend to form the cup. The cup was relatively shallow, at nearly 30% of the previous uptrend. After correcting, the price rallied back to near the old high to finalize the cup. However, the total volume begins to decrease as the market is running out of sellers. The price trend is from sideways to slightly lower, and it carves the handle of the pattern.
Bearish Cup And Handle Trading Example
The handle portion is a retracement downwards from the right side of the cup. Mint Global provides information about, or links to websites of, third party providers of research, tools and information that may be of interest or use to the reader. Mint Global 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. Mint Global does not supervise the third parties, and does not prepare, verify or endorse the information or services they provide. Mint Global is not responsible for the products, services and policies of any third party. Price breaks above the consolidation to trigger a long trade.
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 tables turn once again when the decline stalls high in the broad trading range, giving way to narrow sideways action. Short sellers lose confidence and start to cover, adding upside fuel, while strong-handed longs who survived the latest pullback gain confidence.
How The Cup And Handle Pattern Works
I have also shown the stop loss, entry, and profit target via the green and red boxes. The red box represents the risk (6.5%), which is the difference between the entry point and stop loss. The green box represents the profit target 22.7%, which is about 3.5x the amount risked. The point is simply to find stocks that are performing better than average , and eliminate stocks from the list that aren’t strong. This scan is one way to do it, but really any method that finds stocks that are stronger than average is fine. Whatever the index is up in the last 6 months, this criteria should be more…usually about double.
The inverted cup is the reversal pattern indicating a momentum sell short signal signaling a bearish continuation pattern. The chart patterns happen within a span of three to six months and volume plays a role in the completion of the pattern and the confirmation of the breakout from an uptrend. At the same time, the inverted cup top is formed when there are more sellers bidding for the price to go down. When it happens, it indicates the end of the bull markets. Making investments based on chart patterns is a norm nowadays as they help traders better understand technical analysis.
Trading The Cup And Handle Pattern For Best Results
This pattern consists of two parts, the cup and the handle. The cup forms after an advance and looks like a bowl or an object with a round bottom. Trading range forms on the right-hand side as the cup is completed, and that makes the handle.
Trading the cup-and-handle pattern is one technique that stems from what is known as technical analysis. But the main alternative to this type of analysis is fundamental analysis. It focuses on how the company is doing financially and operationally and can complement the insights of technical analysis. The pattern is partially defined by this final return to growth.
Cup And High Handle
In other words, although the price is on a decline initially, the gradual U-shape is said to wear out speculators and weak security holders, leaving a more stable demand behind. A V-shape Cup implies the price is rebounding, but the reversal is too sharp and does not indicate any near term stability. In such situations, it is often too difficult to trade or make any near term predictions on the price performance of the assets. Famous traders 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. However, the uptrend established during the third phase of pattern development is short-lived. Similar to the Regular Cup and Handle Pattern, the market forces leading to the development of this pattern are different in an uptrend versus a downtrend.
Author: Ashley Chorpenning