The cup is a bowl-shaped consolidation and the handle is a short pullback followed by a breakout with expanding volume. A cup retracement of 62% may not fit the pattern requirements, but a particular stock’s pattern may still capture the essence of the Cup with Handle. A stop-loss order gets a trader out of a trade if the price drops, instead of rallying, after buying a breakout from the cup and handle formation. The stop-loss controls risk on the trade by selling the position if the price declines enough to invalidate the pattern. Chart patterns occur when the price of an asset moves in a way that resembles a common shape, like a triangle, rectangle, head and shoulders, or—in this case—a cup and handle. They provide a logical entry point, a stop-loss location for managing risk, and a price target for exiting a profitable trade.
The two tops of the cup are approximately on the same area. This is the H1 chart of the most traded currency pair – EUR/USD. In the middle of the image you see a bullish Cup and Handle pattern, which is illustrated with the blue lines on the graph. As a swing and position trader you want to follow the big operators who trade with a longer time horizon. In trading in general you want to join in on moves which are initiated by the less nervous players. A proper classic cup and handle pattern needs time to go through the following specificmass psychological phases.
Your first take profit target should be located on a distance equal to the size of the handle, starting from the breakout point. If this target is completed, you can then start pursuing the next target. The second target is located on a distance equal to the size of the cup, applied again from the moment of the breakout. The Cup with Handle trigger signal is at the break out of the handle.
At the time of the trade, a stop loss is placed below the recent consolidation. When the price breaks out of the consolidation we are buying, so if it drops back below the consolidation we get out. Note that the consolidation is often a lot smaller than the entire handle. A trailing stop loss is also effective with this strategy.
- When the conditions described in these 4 stages are satisfied, we have a valid CwH pattern and the stock will be placed on our CwH watchlist, CwHWatch.
- I am a believer in technical analysis and do feel that chart patterns are a very powerful tool.
- The Handle is a trading range or a consolidation area that develops after the Cup is completed.
- Support and Resistance lines are often confused with trend lines but they are horizontal lines under the lows and above the highs respectively.
The databases I built over several decades doesn’t identify every chart pattern. There may be plenty of double tops over the years, for example, that I didn’t catalog on the way to the one I did catalog. So buying an upward breakout from a broadening bottom and selling at the double top I cataloged would be different than choosing to sell a different double top. However, the following analysis does give a real-world flavor for how well you might do trading chart patterns if you follow the pattern pair strategy. The chart above of the Utility SPDR ETF illustrates an inverse cup and handle.
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 cup chart pattern 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.
Do Not Sell My Personal Information
Commodity and historical index data provided by Pinnacle Data Corporation. Unless otherwise indicated, all data is delayed by 15 minutes. The information provided by StockCharts.com, Inc. is not investment advice. Trading and investing in financial markets involves risk. By having the handle and stop-loss in the upper third of the cup, the stop-loss stays closer to the entry point, which helps improve the risk-reward ratio of the trade. The stop-loss represents the risk portion of the trade, while the target represents the reward portion.
That’s not a problem; it’s often a stock’s way of offering a buy point that’s clearer or lower than that suggested by the larger pattern. The stock needs to show a 30% uptrend from any price point, but it must be before the base’s construction. Or, the stock must show a minimum 20% increase from a prior breakout.
Day Trading Encyclopedia
A standard cup and handle structure should develop in a rising market. The equivalent bearish pattern is an inverted cup and handle that appears in a falling trend. While the price has already moved a lot, the cup and handle pattern attempts to capture upside movement following an upside breakout from the handle. If the pattern is bullish, take the two tops of the cup and stretch a curved line downwards until the rounded part reaches the low of the pattern. Then take the right side of the cup and draw the shape of the bearish handle. As the price on the right side approaches the left cup level, the last holders will finally decide to cut their losses and there will be a large volume sell-off.
The drop of the handle part should retrace about 30% to 50% of the rise at the end of the cup. For stock prices, the pattern may span from a few weeks to a few years; but commonly the cup lasts from 1 to 6 months, while the handle should only last for 1 to 4 weeks. The entry point for a cup and handle pattern is to buy when the price moves above the handle formation. This is made simpler by using a drawing tool and waiting for the price to move up and out of the drawn handle pattern. A stop-loss can be placed below the low price point in the handle.
Intraday Cup And Handle
Often you can just look at a chart and see where the trend begins. If not, or you want to be sure, then the glossary describes how to find it. Here are a few ideas the data suggested which may improve performance of your pattern pairs trading. Table 3 shows the performance statistics for this setup . A stop loss order was used and priced a penny below the bottom of the cup . The expectancy averages a gain $3.98 per share per trade which ranks 46th where 1 is the best value.
Volume should ideally rise at least 40% above its 50-day average. Big caps sometimes can break out successfully with smaller volume surges. Be aware that the handle itself, which must stretch for a minimum five trading sessions, can morph into a base of its own in certain cases.
Selling First Bearish Chart Pattern
The pattern on the left is more complex as the cup pattern is wavy and harder to identify. The pattern on the right is more traditional, with a clear cup shape, followed by a handle breakout to the upside. The confirmation of the pattern comes when the price action breaks the channel of the handle foreign exchange market 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.
Draw the extension tool from the cup low to the high on the cup’s right, and then connect it down to the handle low.
A complete list of our criteria is provided at the end of this article. There are several benefits of using the cup and handle pattern. First, it is a relatively easy pattern to identify in a chart.
Therefore, we believe that the upward trend will continue as bulls attempt to retest the previous high of $1920. When it does this, we expect that there will be an indecision between the bulls and the bears, which will push the price lower before an eventual rally. The price then started to decline http://123autismschool.com/introduction-to-stock-markets/ and reached a low of $1050 in October 2015. A good example of cup and handle pattern at work is to look at the long-term chart of gold. In most cases, you should ensure that the depth is about a third of the previous upward trend. A good way to note this is to use the Fibonacci Retracement.
A cup and handle is considered a bullish signal extending an uptrend, and it is used to spot opportunities to go long. James Chen, CMT is an expert trader, investment adviser, and global market strategist. Replacing the stop loss with a 10% trailing stop cut the gain to 8% but also trimmed Famous traders the average loss to 5%. Using a 25% trailing stop allowed me to keep more money, 27%, but losses climbed to 11%. If I didn’t use any type of stop, the gain averaged 113% with losses averaging 33%. Here’s a list of the top five performing sell signals, based on annualized gain .
Follow this step-by-step guide to learn how to scan for hot stocks on the move. With forex trading, you don’t own the underlying asset, which means you can go long or short . Trading foreign exchange on margin carries Fiduciary a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite.
Author: Margaret Yang