Cup and Handle Pattern: How to Trade and Target with an Example

In my experience, narrow or tall patterns tend to perform better than wide or short ones. Conversely, a reversal is the opposite of a continuation. It usually occurs when the market reaches a top or bottom and begins to lose momentum. Get Started Learn how you can make more money Cup and Handle Pattern with IBD’s investing tools, top-performing stock lists, and educational content. At that point, it makes sense to exit the stock, even if the 7%-8% loss-cutting sell rule has not yet been triggered. For the weekly chart, the moving-average line traces 10 weeks’ worth of turnover.

A large increase in volume during the breakout could suggest that institutional investors are getting behind the stock. This could lead to even more price increases in the future. Many traders look for volume confirmation to signal that a buy is warranted. The implication is that the downward trend from the previous move has ended and that prices will resume their uptrend. Many analysts look for confirmation of a strong buy signal in the form of a volume spike. Price makes a straight or nearly straight down move before reversing and heading up.

What does the cup and handle tells you?

Measuring the distance is a key step to validating the pattern. Moving average confirmation – The 50-day moving average should be above the 200-day moving average, and both moving averages should be trending higher. Wait for volatility to contract during the handle, and volume should drop during the consolidation.

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. Traditionally, the cup has a pause, or stabilizing period, at the bottom of the cup, where the price moves sideways or forms a rounded bottom.

Cup and Handle Key Points, & Examples

But the point is that you need to define exactly how the handle will look, and at what point you will trade it. The price can be quite choppy while forming a handle, so if you don’t have precise rules, you will have more losing trades. Write down all the details of how you will trade in your trading plan. In the pattern above, the stock fell by about 60% and then quickly recovered (the “cup”). During this particular time period, this happened to a lot of stocks.

When you look at the handle with the price advance that forms the right side of the cup, it looks like a flag or pennant. O’Neil is the innovator of the CANSLIM method and one requirement was that the stock must form some kind of a cup and handle pattern.

Recognizing Cup and Handle Patterns

It is a bullish continuation pattern which means that it is usually indicative of an increase in price once the pattern is complete. The cup and handle pattern is a bullish continuation pattern triggered by consolidation after a strong upward trend. The pattern takes some time to develop, but is relatively straightforward to recognize and trade on once it forms. As with all chart patterns, trading volume and additional indicators should be used to confirm a breakout and continuation of the original bullish price movement.

Order execution should only occur if the price breaks the pattern’s resistance. Traders may experience excess slippage and enter a false breakout using an aggressive entry. 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. An ‘inverted cup and handle’ is a chart pattern that indicates bearish continuation, triggering a sell signal.

Step Checklist: How to Properly Identify a Cup and Handle Pattern

Technical analysis is the practice of using past trading activity, such as price and volume, to predict a stock’s future price movement. For more information on this pattern, readEncyclopedia of Chart Patterns Second Edition, pictured on the right, pages 149 to 163. That chapter gives a complete review of the chart pattern, compared to what is described below. From the chart, you can see that the price formed a cup between June and October 1999. By November, it has formed a handle and eventually broke above the handle. The cup looks like a “u” or a bowl with a rounded bottom. It forms after a price rally, and its depth should be 30-50% of the rally preceding it.

Remember that you should always use your knowledge and risk appetite to decide if you are going to trade based on ‘buy’ or ‘sell’ signals. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money. The next way to trade the pattern is to wait for a break and retest. Here, you should wait for the price to retest the now-support level and place a bullish trade. An inverse https://www.bigshotrading.info/ is the exact opposite of what we have talked about.

Near the high is best – The best cup and handle patterns develop within an existing uptrend and with the price near 52-week highs. Near the 52-week high is ideal, but #2 below is also okay.