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Cup and Handle Pattern

During the stock’s actual breakout, you want to see a new wave of buyers coming in at a torrid pace, not a trickling one. If there is no handle, then the cup itself must stretch a minimum six weeks. You need to know if that cup with handle is as it should be, or if it has flaws. The cup can be spread out from 1 to 6 months, occasionally longer.

  • Cup and handle patterns are easily identified on a chart because of their unique appearance.
  • The handle lasts a few weeks before price begins moving up.
  • IG accepts no responsibility for any use that may be made of these comments and for any consequences that result.
  • The forming of this pattern allows the stock to base or take a “breather” before its next move up and is seen as healthy action.
  • If there is no handle, then the cup itself must stretch a minimum six weeks.

Now, you don’t want to put your stop loss at the exact low of the handle because the market could trade into that area of value and reverse higher. “Your stop loss should be placed at a level where if the market reaches it, your trading setup is invalidated”. Because this is a sign of strength telling you there are buyers willing to buy at these higher prices.

How to Trade the Cup and Handle Chart Pattern

The stop-loss controls risk on the trade by selling the position if the price declines enough to invalidate the pattern. A profit target is determined by measuring the distance between the bottom of the cup and the pattern’s breakout level and extending that distance upward from the breakout. For example, if the distance between the bottom of the cup and handle breakout level is 20 points, a profit target is placed 20 points above the pattern’s handle. Stop-loss orders may be placed either below the handle or below the cup depending on the trader’s risk tolerance and market volatility. When the price breaks below the handle, it signals traders to exit long positions or enter a short position. A stop-loss order is then placed above the handle and a profit target is calculated by the height of the cup subtracted from the handle breakout point.

Our team at Trading Strategy Guides is working hard to develop the most comprehensive guide on different chart pattern strategies. In order to understand the psychology of a chart pattern, please start here, Chart Pattern Trading Strategy step-by-step Guide. The chart above is a daily gold chart in which we have drawn the “cup and handle”. I hope https://www.bigshotrading.info/ this answers the question posed by one of our readers. One of the comments from yesterday’s “After Hours” article was a question about the identification and validity of a pattern. I felt that the reader was correct in identifying this pattern and warranted an explanation of how to incorporate this pattern into the current price action in gold.

Market Holidays

You are simply projecting the same distance in price to the upside using as a starting point the initial Cup peak. Trading to the target maximizes the potential profit and it gives us the chance to capture the entire trend. Each of the two key components, the cup and the handle, triggers specific crowd behavior. The bottom of the pattern will dip about 15% to 50% from the peak. If you drop lower than 50% from the peak the pattern is invalidated . All the same concepts apply, regardless of whether the cup is “U” shaped, “V” shaped or wavy, or whether the handle is a triangle, wedge, or channel. The potential profit is twice the risk because the risk is the size of the handle.

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Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. A trailing stop-loss may also be used to get out of a position that moves close to the target but then starts to drop again. 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.

Picking a Target or Profitable Exit

This is considered the “high handle.” Secondly, since the market is fractal, these patterns will form on a variety of charting time frames, including intraday charts. The price of the MARA is forming a potential inverted Cup and Handle Pattern. A cup-and-handle pattern is usually interpreted as a bullish continuation pattern.

Cup and Handle Pattern

Like any form of pattern and technical analysis, there are times when this predictor works well and other times when the forecast does not work out. There are situations when the reliability of the cup and handle pattern is diminished. The pattern is confirmed when prices break above the high of the handle as the previous uptrend continues. There are several benefits of using the cup and handle pattern. First, it is a relatively easy pattern to identify in a chart. Second, you don’t need to use any technical indicators like the RSI and moving averages. It then finds some support and moves upwards again and finds resistance around the 50% retracement.

What Happens in a Cup-And-Handle Pattern?

So whenever you see a buildup of higher lows into resistance, it’s a sign of strength. IBD Videos Get market updates, educational videos, webinars, and stock analysis.

When evaluating whether a cup and handle pattern is real, it is important to look at the shapes of both the cup and the handle. As you know by now, the pattern consists of two parts, the cup plus the handle. The pattern cannot be anticipated until nearly all of the cup is completed and the price is near the old high. Here is an example of the cup and handle pattern in a Bitcoin chart from 2019. The risk and stop loss on the trade will be set at the low of the handle. This way, if the breakout fails and falls back below the handle’s low, then you can close out the trade at a small loss and move on to the next opportunity. Both sets of buyers exit the market; as a result of this entrapment, these buyers are nervous and slowly sell out, creating the handle of the pattern.