How to Trade a Cup and Handle’s 95% Winning Trades Tested

If you’ve spotted a cup and handle pattern forming on a stock chart and wondered, “What is a cup and handle pattern, and is it a reliable trading signal?” – read on. The tables turn once again when the decline stalls high in the broad trading range, giving way to narrow sideways action. Short sellers lose confidence and start to cover, adding upside fuel, while strong-handed longs who survived the latest pullback gain confidence. Relative strength oscillators now flip into new buy cycles, encouraging a third population of longs to take risks. A positive feedback loop sets into motion, with price lifting into resistance, completing the final leg of the pattern, and breaking out in a strong uptrend. For example, if the distance between the bottom of the cup and the handle breakout level is 20 points, a profit goal is set 20 points above the handle of the pattern.

Depending on the trader’s risk tolerance and market volatility, stop-loss orders can be placed either below the handle or below the cup. Whereas, in the uptrend, this pattern indicates the continuation of the trend. When the Cup and Handle Pattern forms in an upward rally the price continues to go up after the breakout point. The Cup and Handle pattern can appear on various timeframes, from intraday charts to multi-year charts.

Volume Indicators with the Cup and Handle Pattern

Further down in the article we have several charts to show how it looks like in a chart. A cup and handle pattern entry point is set when the price penetrates the trendlline resistance level of the pattern. This is the long entry point for the trade and is the cup and handle pattern breakout point. Watch for an increase in buying volume and bullish momentum as the price rises above this neckline resistance point.

Cup and Handle Pattern: Shape, How to Trade with Examples

Just sign up for your Wagner Daily PRO membership to receive the best swing trade alerts for the cup and handle and other top patterns. While generally reliable, confirming the pattern with volume and other technical indicators is essential to avoid false breakouts. Using indicators while trading the cup and handle pattern is crucial to maximize your trading profits. Determine the distance between the lowest point of the cup and the resistance line (the top of the cup) to set a profit target for the cup and handle pattern. Moreover, while the cup and handle pattern has a rounded bottom recovery and a handle consolidation or pullback, the inverse pattern has a rounded top and a handle consolidation or slight upward movement. The cup and handle pattern forms in several stages, each crucial to identifying and confirming the pattern.

If you are having a bearish cup and handle formation, you should see a bearish breakout through the handle. If the bullish cup and handle occurs after a bearish price move, it will be considered a reversal pattern. As the base of the cup forms, the volume should remain lower than the average. The volume indicator, which assesses the strength of a cup and handle pattern breakout, is the most widely used indicator with cup and handle patterns. Although price is expected to rise after a cup and handle pattern breakout, there is no guarantee.

What Are The Types of Cup and Handle Patterns?

It marks a slightly downward or sideways price movement and then an uptrend that pushes past the resistance level causing a breakout. The cup and handle pattern as well as the inverted cup and handle, are highly valuable technical analysis patterns for traders who are looking for potential buying or selling opportunities in the market. Traders can manage their risk and potentially capitalize on the market’s trends by identifying these patterns and the entry point during the trade. The Multi-Year Cup and Handle pattern represents an extended consolidation phase, often spanning several years rather than weeks or months.

The stop-loss manages risk, while the target represents potential reward. Two decades of research by Tom Bulkowski show that after a cup and handle pattern is confirmed on a break of the neckline on higher volume, the price increase averages +54%. The chart above shows that the height/depth of the cup and handle is equal to the price target. To help identify cup-and-handle patterns quickly and easily, use TradingView’s pattern recognition tool.

The handle is marked by a small price pullback of up to 50% of the cup component. The cup and handle pattern target price breakout component is when market prices penetrate the pattern resistance area on rising bullish volume. This component confirms the pattern signal which triggers buying momentum and entry points for traders.

The price remains stable at this point, creating the base of the cup that is the support. However, after the period of consolidation, the stock witnessed another uptrend creating the right edge of the cup. At the high point, it achieves the price of Rs.90.5, recovering from the downtrend that started a few months prior. For instance, a perfect cup pattern has equal highs on both ends (although this does not always hold). An important thing to remember is that the handle forms on the right side of the cup. However, the pattern must be complete, as instances of the cup and handle pattern failure are not uncommon.

How Long Does It Take for a Cup and Handle Pattern to Form?

This handle looks nothing like the ideal pattern but serves the identical purpose, holding close to the prior high, shaking out short-sellers, and encouraging new longs to enter positions. Note that a deeper handle retracement, rounded or otherwise, lowers the odds for a breakout because the price structure reinforces resistance at the prior high. After the cup with handle confirmed as a valid chart pattern, Valaris (VAL) coughed up a fur ball at A. The cup phase is formed when the price faces a downtrend but also recovers equally after consolidating a bit at the bottom.

Cup and Handle Pattern Entry Points

The handle should not dip below the half-way point of the cup’s depth, as it signifies a slight pause or consolidation before the price attempts to break out. The breakout occurs when the price moves above the resistance level marked by the rim of the cup. For validation, traders often wait for an increase in volume during the breakout to confirm the pattern’s strength and the likelihood of a continued uptrend. While there are many different types of chart formations out there, the cup and handle pattern strategy is one you may want to add to your trading arsenal because of its reliability. Trading securities using chart patterns and reading stock charts is widespread in the market. These patterns, like rectangles, triangles, or cup-and-handle shapes, emerge as a security’s price moves in a certain way.

• Ideally, the stop-loss should be in the upper third of the cup and handle pattern.
• Finally, the security breaks out again, surpassing its highs that are equal to the depth of the cup’s low point.
• A cup and handle is a bullish indicator that extends an uptrend and is used to identify opportunities to buy the stock.
• This pattern can be seen within an ongoing uptrend and suggests that the uptrend is likely to continue even after the pattern is completed and confirmed.
• As the names suggest, this is simply an upside down cup and handle version of the classic formation.

• In a nutshell, the inverted cup and handle pattern is a flipped cup and handle.
• Another issue has to do with the depth of the cup part of the formation.
• During this period, the price slightly retraces, fluctuating within a narrow range between $90 and $100, signaling that selling pressure is diminishing.
• To confirm this pattern, the price needs to break above the resistance level formed by the rim of the cup.
• Either way, once a valid breakout sticks, post-cup upside momentum kicks in which offers swing traders sizable profit potential if they act quickly while managing risk.
• Maintaining discipline through adherence to a predefined trading plan is equally important.

Each component is required for identifying a cup and handle pattern on a price chart. To scan for a cup and handle pattern, you can use manual charting techniques to look for the U-shape pattern in a stock’s price action. You can also use automatic screeners such as TC2000 to look for the pattern.

It ground sideways in a broadening formation (second blue box) that looks nothing like the classic handle for another three weeks and broke out. This rally failed to reach the measured move target at 50, calculated by adding the four-point depth of the cup to the resistance line near $46. Let’s consider the market mechanics of a typical cup and handle scenario. A new rally prints a high, and the price rolls over into a correction, flipping relative strength oscillators into sell cycles that encourage strong-handed longs to exit positions. New buyers enter the pullback at the 38.6% or 50% retracement level, expecting the prior uptrend to resume. The security bounces and tests the high, drawing in aggressive short-sellers who believe that a new downtrend will elicit a double top breakdown.