As a general rule, cup and handle patterns are bullish price formations. The founder of the term, William O’Neil, identified four primary stages of this technical trading pattern. First, approximately one to three months before the “cup” pattern begins, a security will reach a new high in an uptrend.
- 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.
- The pattern’s formation may be as short as seven weeks or as long as 65 weeks.
- The EMA 20 line acts as a dynamic resistance that prevents the price to go up.
- In this blog post, we will be discussing how to use a cup and handle reversal pattern to identify potential opportunities in the market.
- Its concept can be applied across markets which are liquid and across timeframes when the market is liquid as well.
This results in a wide stop loss and a smaller position size on your trade. 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.
What Happens After a Cup and Handle Pattern??
Let me remind you that the inverted cup and handle breakout is only confirmed when the price action closes below the support line. The target with the cup and handle pattern is the height of the cup added to the breakout point of the handle.
In my experience, narrow or tall patterns tend to perform better than wide or short ones. You can find this pattern on both uptrends and downtrends when the price climbs up steadily to reach a new high, and then falls back down to test the low of the initial move.
What is the Cup and Handle pattern and how does it work?
As you see, the price action breaks to the lower level of the S/R zone, which indicated that the price will probably continue in the bearish direction. Note the large bearish move on the chart following the breakdown. Also notice how the pattern starts with a bullish trend, which gradually reverses. At the end of the reversed bearish move, the price reverses again and starts the creation of a bullish handle.
Volume breakout After the formation of the cnh, the market will try to make a run, temporarily breaking the horizontal resistance. In order to identify a cup and handle pattern failure, there will need to be certain components on the price chart of a market. 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 price action breaks upwards and we apply the two targets. The first one is with the size of the handle and the second with the size of the cup.
Candlestick Trading Bible Patterns PDF Guide
Use the smaller height and add it to the breakout point for a conservative target. You could also use the larger height for an aggressive cup and handle reversal target. Learn about the cup and handle, how to trade it, and what to watch for to improve the odds of a profitable trade.
Can a cup and handle be a reversal?
A cup and handle chart may signal either a reversal or continuation pattern. A reversal pattern occurs when the price is in a long-term downtrend. It then forms a cup and handle that reverses the trend, and the price starts rising.
Whatever the height of the cup is, add it to the breakout point of the handle. For example, if the cup forms between $100 and $99 and the breakout point is $100, the target is $101. For example, if a cup forms between $99 and $100, the handle should form between $100 and $99.50, ideally between $100 and $99.65. If the handle dives too deep and erases most of the gains of the cup, you should avoid trading the pattern. A double bottom pattern is a technical analysis charting pattern that characterizes a major change in a market trend, from down to up. A breakout trader looks for levels that a security hasn’t been able to move beyond, and waits for it to move beyond those levels, as it could keep moving in that direction. Consider a scenario where a stock has recently reached a high after significant momentum but has since corrected, falling almost 50%.