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A Cup and Handle price pattern is a technical chart setup that resembles a cup with a handle. The cup has a “u” shape, and the handle is a slight downward correction. Typically, the “cup and handle” is a bullish pattern and can be considered a continuation and reversal formation. It is safe to mention that this chart formation — the cup and handle — can identify the key breakout levels along with the market psychology. All of this makes it one of the more accessible and easy-to-understand patterns in technical analysis.
- However, sometimes, the market closes much higher and you get a poor cup and handle pattern target entry point.
- It’s created when a stock or security price falls, then rises again to form a U-shaped cup, then falls once more (but not as far) to form the handle before rebounding.
- A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.
- The traditional buy point is a breakout above the high of the handle, which clearly puts bullish momentum on your side.
- The chip stock had more than doubled from its December 2018 low when it hit a peak at 35.55 in August 2019 (1).
- Yes, the cup and handle pattern is a bullish signal, with the right-hand side of the pattern typically experiencing lower trading volume.
A successful breakout of resistance is a signal for opening a position in the framework of a strategy based on the recovery of a bullish trend. A long position can be opened at a breakout price or at a closing price of the breakout bar. A protective stop order is placed near the low of the latest price https://www.bigshotrading.info/stock-trading-courses/ fluctuation. A trade should be closed using Profit Factor or by moving 2R projection to the stop loss point. In addition, the line connecting the cup and handle at their base is no longer a resistance line, but a support line. When prices break through this, it signals the beginning of a new downtrend.
What should traders look for in Cup-And-Handle Pattern?
However, it is more accurate when viewed on a higher timeframe — such as a daily, weekly, or even monthly chart. Opponents of the V-bottom argue that prices don’t stabilize before bottoming and believe the price may drop back to test that level. But, ultimately, if the price breaks above the handle, it signals an upside move. Consider a scenario where a stock has recently reached a high after significant momentum but has since corrected, falling almost 50%. At this point, an investor may purchase the stock, anticipating that it will bounce back to previous levels.
A cup and handle pattern, also known as a “cup with handle” pattern, forms when market data is compiled and viewed over time. It’s created when a stock or security price falls, then rises again to form a U-shaped cup, then falls once more (but not as far) to form the handle before rebounding. It’s generally considered a bullish pattern and predicts a continuation of the advance that was taking place before the decline that formed the cup. Named for its distinctive shape, the cup and handle pattern is a powerful, bullish signal that can indicate a stock or crypto is likely to see a price increase in the future. This top chart pattern is a favorite among swing traders, who have been relying on this pattern for decades to spot potential opportunities for profit.
What Happens After a Cup and Handle Pattern Forms?
If the trend is up and the cup and handle form in the middle of that trend, the buy signal has the added benefit of the overall trend. In this case, look for a strong trend heading into the cup and handle. For additional confirmation, look for the bottom of the cup to align with a longer-term support level, such as a rising trendline or moving average. A Cup With Handle pattern is a bullish continuation pattern that marks a consolidation period followed by a breakout. The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout.
At this selling point, the handle or the pullback portion of the chart pattern takes shape. If the price can breach the resistance level, the stock witnesses a breakout. Traders are bullish at this point, signified by an increase in the trade volume. As a result, they push the stock price even higher as the breakout gathers strength.
Master the Cup and Handle Pattern: Simple 10-Step Checklist for Profitable Trading
While the standard pattern is bullish, an inverted cup and handle pattern can imply bearishness. Another related technical analysis indicator to keep in mind is an inverted cup and handle pattern. Some traders consider that pattern a harbinger of a downtrend in the asset’s price that helps identifying selling opportunities. Most of the same general rules, such as the handle not exceeding 1/3rd of the cup, still apply.
The volume of trade increases substantially once the stock breakouts by breaching the stock’s resistance level. Once the cup pattern in the chart completes, the handle forms as the price stalls or moves downwards. The pullback is ideally less than or equivalent to 1/3rd of the prior advance. It marks a slightly Cup and Handle Pattern downward or sideways price movement and then an uptrend that pushes past the resistance level causing a breakout. As the name suggests, cup and handle chart patterns resemble a cup and a handle. The handle is a smaller cup formed after the completion of the cup and is generally followed by a breakout.
What happens after a cup and handle pattern?
To mitigate the risk of a false breakout, you should look to see if there’s increased volume before the breakout and set a stop loss just below the resistance level. As you will see below, it plays a big part in determining your expected profit target. Put simply, the deeper the cup, the higher we can expect prices to go when they eventually breakout. This screenshot is taken from MetaStock, which is a pattern recognition software designed for finding these sorts of chart patterns. TrendSpider is another great platform that uses AI algorithms to detect chart patterns.
In the cup and handle pattern, as the stock price moves upwards, there is selling pressure among investors who want to consolidate their profits at new highs. As a result, there is a downward spiral in the price movement and a price correction. Bulls or buyers start accumulating the stock for long positions as speculators leave their positions. There is an increase in volume at this stage as the U-shaped bottom gives way to an uptrend, creating the second edge of the cup. As stocks attain new highs, there is selling pressure among investors to book profits, causing the price to fall.
This provides a prime opportunity for traders to open positions as the price begins to rise. It also helps them avoid opening short positions against the upward trend. An important feature is the trading volume that should be growing in the area of the Cup’s bottom. It will prove that big sellers are going to defend their long positions.
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