The trade should be closed if the price action breaks the upper barrier. You can even adjust your stop loss order ExxonMobil stock price right above the upper level of the zone. The rounded part is the Cup and the small bearish channel is the handle.
Prices move up an average of 54% after a breakout, according to the Encyclopedia of Chart Patterns. Independent testing also shows that gold could trade much higher based on the C&H. Don’t think of missing the first move up as a bad cup and handle thing. Especially if the pattern breaks down or the bulls are caught in a trap. That could be a problem if you’retrading options for a living. Options expire and if you don’t give yourself enough time, you’ll lose that investment.
First, longs entering deep in the pattern get nervous because they were betting on a breakout that fails. At the same time, longs chasing the breakout watch a small profit evaporate and are forced to defend positions. Both groups are now targeted for losses or reduced profits, while short sellers pat themselves on the back for a job well done.
We would look to place our entry order over highs and get taken into the trade on any upside move. When and if price stalls at this level, we call it the peak of the cup and now we want to see the handle form. The handle of the cup as seen on the right can also be considered a bull flag or a trading range and traders can trade that pattern. So I don’t go on the hunt for the cup and handle pattern. But — and this is super important — a lot of traders do. Setting a stop-loss order is an important part of successfully trading using a cup and handle pattern.
The handle should not be that deep and should remain in the upper half of the cup’s range. A shallower handle shows more strength than a deep one. An inverse general ledger pattern is the exact opposite of what we have talked about. The pattern happens when the price of an asset is declining. A good example of cup and handle pattern at work is to look at the long-term chart of gold. Price falling too deep will demoralize the buyers and the edge in the pattern would be gone. As price moves moves lower and then higher, it forms the sides of the cup and eventually meets up with the previous pivot high that forms potential resistance.
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 https://g-markets.net/ with this strategy. Calibrate it to each stock traded by looking at prior setups on the chart and adjusting the settings so it performs how you want on those. Hopefully, it will perform the same way in the future.
The handle often takes the form of a sideways or descending channel or a triangle. Buy when the price breaks above the top of the channel or triangle.
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Do note that the pause may not always be a flag, sometimes it might take other forms, but the idea is the same. We can then place a stoploss below the handle, and since the handle is usually pretty small relative to the pattern, the risk will not be very high. The first opportunity would be to enter during the handle phase before the breakout, but if you miss that, they next best chance is to enter on the first pullback after the breakout.
Also, remember smart trading requires more than just knowing a pattern. I’ve given you hints in this post about how to trade the cup and handle pattern. But if I gave you only “buy here, sell here” I’d be doing you a great disservice. The cup and handle pattern is sometimes unreliable when using it to trade illiquid stocks. The time frame of cup and handle patterns can range from one day to several years, making this indicator occasionally ambiguous. It can take a while for the cup and handle pattern to fully form, which can result in late decision-making on behalf of traders. 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.
It’s all so you can ask questions, get answers, and find your market groove. 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. The handle will typically form a descending trendline … Take a look at the chart below for an example.
How To Identify The Cup And Handle Pattern
Let’s take a look at a potential Cup and Handle trading system and the rules we need to follow when trading this pattern. After the price breaks the handle downwards, we see the creation of a new bearish move. Then comes the handle, which is expressed by a bearish price move. In many cases, the handle is locked within a small bearish channel on the chart.
The Cup and Handle pattern can take between 30 to 50 candles to form on any given time resolution. The second example is another classic cup and handle pattern that develops over three to four months, with the handle forming over approximately two weeks. The cup retraces slightly more than half the preceding movement, which is relatively mature prior to the cup and handle pattern’s formation. The right side of the handle rises higher than the left and the pattern slightly overestimates the extent of the bullish continuation after the breakout. Inverted cup and handle patterns are also possible during downtrends and signal bearish continuations.
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 and reached a low of $1050 in October 2015. The pattern happens when bulls are overpowered by bears in. As more bears come, the price moves lower to a certain point. Bulls then start coming in and take the price to the previous high. This is a bullish pattern that was developed by William O’Neill, who wrote about it in a book he published in 1988.
You need to know if that cup with handle is as it should be, or if it has flaws. Greed, fear, hope, despair and other emotions drive stock prices. The cup can be spread out from 1 to 6 months, occasionally longer. Ideally, the handle will form and complete over 1-4 weeks. Fibonacci clusters are areas of potential support and resistance based on multiple Fibonacci retracements or extensions converging on one price. The next breakout attempt fails at the prior high, yielding a secondary pullback that holds near resistance, grinding out a smaller rounding bottom, which becomes the “handle.” A head and shoulders pattern is a bearish indicator that appears on a chart as a set of 3 troughs and peaks, with the center peak a head above 2 shoulders.
Cup And Handle Pattern Failure
Recommend you guys to start with other patterns first instead of this. It’s so rare that this pattern happen and I am a pips trader. For cup and handle reversal, look for a strong accumulation base to build the move. This can be done by taking the maximum height of the cup, and projecting that distance from the breakout point. For trading, we would look to enter during the handle formation, which would be very close to the resistance level.
This may be a bullish flag or pennant pattern, or a short pullback. Ideally, the handle should retrace no more than 1/3 into the cup’s depth. The shorter the retracement in terms of both time and distance, the more bullish the pattern. For some stocks, I expect a lot more out of them because they have a lot of momentum.
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If the stop-loss is below the half-way point of the cup, avoid the trade. Ideally, the stop-loss should be in the upper third of the cup pattern. For example, if a cup forms between $99 and $100, the handle should form between $100 and $99.50, and ideally between $100 and $99.65. If the handle is too deep, and it erases most of the gains of the cup, then avoid trading the pattern. The price target following the breakout can be estimated by measuring the distance from the right top of the cup to the bottom of the cup and adding that number to the buy point. Wynn Resorts, Limited went public on the Nasdaq exchange near $11.50 in October 2002 and rose to $164.48 five years later.
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If it formed a V it would be considered too sharp for a reversal. The softer the U shape of the cup, the more it ensures the cup is the consolidation pattern. In fact, you want to avoid a sharp V shape because this then changes the pattern. As a result, the cup should resemble a bowl or kind of a rounding bottom. The best chance to buy those stocks at a low price could be over the weeks ahead. To learn the stocks we own and intend to buy that have 3x to 5x potential, consider learning more about our premium service. It is a bullish continuation pattern, which means the pattern itself leads to a continuation of the prevailing, bullish trend.
What Is The Cup And Handle Pattern?
Sometimes the cup forms without the characteristic handle. Finally, one limitation shared across many technical patterns is that it can be unreliable in illiquid stocks. The price rejects forming a double top as a bull flag reversion forms the handle. When the bull flag triggers spiking the price through the lip, the cup and handle pattern is triggered the trend resumes the next leg higher with new highs. Usually cup and handles are considered bullish patterns. However, the bearish version can form when the pattern is inverted. Cup and handle patterns are a bullish pattern that look like the name that they are called.