Cup and Handle Patterns in Trading

Cup and Handle Pattern

The main reason for this is that bear markets are characterized by high levels of fear and uncertainty and investors tend to sell on any break-outs or rallies. This selling pressure creates a hard environment to gain traction after a cup and handle breaks out to the upside. Out of these, the cup and handle defines market psychology in the best possible way and is one of the easiest patterns to read. And in the case of our pattern, it should happen after the handle-specific consolidation. The trick here is to keep an eye on the upper trendline (downward sloping) of the handle and keep validating the same with momentum or moving average-specific bullish indication. Cup and handles allow traders to enter a position at the start of a new strong uptrend, thus maximizing profits.

Cup and Handle Pattern

However, the price fails to continue moving higher and instead it reverses and declines much lower. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. 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.

What Timeframe Of Price Charts Can A Cup And Handle Pattern Fail?

The road to effective technical analysis doesn’t end with a cup and handle pattern. Take the example of General Electric’s (GE) chart from 2016, with a clear cup and handle formation in effect. After breaking the resistance of $193.08, GE couldn’t soar higher and went down, marked by the arrow. It even fell lower than the bottom of the cup, hinting at a false breakout. But there have been instances of false breakouts, trapping unwitting investors. In case you are concerned about the same in regards to the cup and handle formation, a MACD crossover — when the MACD line crosses above the signal line — is a good indication.

  • The cup and handle indicator has long been used by traders to determine the direction in which an asset/stock may move.
  • The handle follows the classic pullback expectation, finding support at the 50% retracement in a rounded shape, and returns to the high for a second time 14 months later.
  • Here is ETH’s chart from late 2020, with the $483 level acting as a strong resistance for the drawn cup and handle pattern.
  • Also, because the trades have not actually been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity.
  • When the price breaks below the handle, it signals traders to exit long positions or enter a short position.

Testimonials appearing on the Company’s websites may not be representative of other clients or customers and is not a guarantee of future performance or success. If repeat violations, Topstep may ban the trader from use of all or a portion of the Site and Services. If you’re short, you want to exit your trades before swing low or Support. In a trending market, the price can remain above a Moving Average for a long period of time.

Cup and Handle chart pattern: How to exit your winners and ride big trends

Thereafter, the currency pair trades around the same 2.5 level for some time before witnessing an uptrend once again. The uptrend raises the USD/EUR prices to 4.4, which is very close to the previous high price of 4.5. At this point, a U shaped Cup forms, signaling a possibility of the Cup and Handle Pattern formation. A temporary downtrend then replaces the uptrend as USD/EUR prices start falling again and reach a level of 2.7, another low. This forms the Handle of the Cup and Handle Pattern, confirming the bullish reversal pattern.

When a stop-loss is below the halfway point, it is better to reject such trades. The below GBP/USD daily chart shows an Inverse Cup and Handle pattern from February 2022 to September 2022. The currency pair was trading in a bullish channel from March to June.

‍Example Of A Failed Cup And Handle Pattern In Forex

You’ll get full access to our platform, preloaded with virtual funds. The cup-and-handle pattern is just one of these and Cup and Handle Pattern should not be used in isolation. Volume confirmation is key when trying to identify a stock that is ready to break out.

  • To determine the cup and handle, follow price movements on a chart and look for the “u” shape and the downward handle.
  • CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
  • The breakout from the handle’s trading range signals a continuation of the prior uptrend.
  • The cup has a “u” shape, and the handle is a slight downward correction.
  • According to O’Neil’s description, the handle should extend no longer than between one-fifth to one-quarter of the cup’s length.
  • To qualify as a cup and handle pattern, the retracement of the cup should be 1/3 or less of the previous advance.
  • Both of them are among the most popular and widely used classical chart patterns.

Another issue has to do with the depth of the cup part of the formation. Sometimes a shallower cup can be a signal, while other times a deep cup can produce a false signal. Finally, one limitation shared across many technical patterns is that it can be unreliable in illiquid stocks. The cup and handle is considered a bullish signal, with the right-hand side of the pattern typically experiencing lower trading volume.

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