How to Trade Cup and Handle Pattern: Examples, Limitations

This is the point where the tables turn, with the selling pressure and weaker hands going down. Being able to measure the depth of the cup is necessary as it allows aggressive traders to identify the maximum profit potential. Traders should set the approximate target stop loss level in a cup and handle at the point above the cup’s rim after the handle is formed. The exact percentage stop loss depends on the price target expectations and the timeframe. According to Tom Bulkowski’s research, the success rate of a cup and handle is a 95 percent chance of a 54 percent price increase in a bull market on a continuation of an uptrend.

Identifying the handle and cup pattern requires subjective interpretation. Traders may have different opinions on whether a particular price structure qualifies as a valid https://www.bigshotrading.info/blog/rules-for-picking-stocks-when-intraday-trading/ pattern which can reduce confidence and make it difficult to follow the pattern. CFTC Rule 4.41 – Hypothetical or Simulated performance results have certain limitations.

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Of course the pattern has its bearish equivalent, the Inverted Cup and Handle, which we will touch upon later as well. If a cup handle pattern develops and is confirmed, the price should rise sharply in the medium to short term. On daily and monthly charts, this pattern is seen when an outgoing downward price wave is followed by a period of stabilization.

They are continuation patterns and usually form in bullish trends. Most of these patterns are very reliable and offer great trading opportunities. The “cup” formation is developed as a consolidation phase during price rallies from the round bottom formation over multiple weeks to months. The “handle” part forms due to a cup and handle pattern time frame price correction after the cup formation and before a clear breakout to the upside. And yes, there is an inverse cup and handle in the technical analysis world, which is nothing but bearish. To set a price target for a cup and handle trade, traders can measure the depth of the cup from its high point to its low point.

Unpacking the cup and handle pattern

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• Both groups are now targeted for losses or reduced profits, while short-sellers pat themselves on the back for a job well done.
• A proper handle forms in the upper half of the base and is at least five trading days long, typically light in volume.
• But merely identifying the cup and handle chart pattern is not enough to profit.
• For instance, a perfect cup pattern has equal highs on both ends (although this does not always hold).
• In order for me to consider a cup and handle trade, I want to see the handle contract.
• 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.

That way, you can enter mid-way even if you miss the surge from the bottom. It is ideal for the pattern to have a bowl-shaped bottom and an even downward-sloping handle. Yet, in most cases, the chart formation might show a sharp “V” and a somewhat downward-sloping handle that is either a pennant or even a wedge. As long as the bottom forms at less than 50% of the previous uptrend and the handle doesn’t retrace over one-third in regards to the cup’s depth, you should be good to go. As this projection offers an approximate target, traders can enter the asset anywhere inside this trading range, provided other indicators validate the pattern formation.

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It is characterized by a relatively shallower and narrower price range than the cup. Futures trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the investor’s initial investment. Nothing contained herein is a solicitation or an offer to buy or sell futures, options, or forex. Past performance is not necessarily indicative of future results. Pro traders can use fiber levels early on to place stop losses at specific levels.

Verifying a higher volume of trade at the breakout increases pattern reliability. Many cup and handle traders adhere strictly to O’Neil’s rules for construction, but there are many variations that produce reliable results. In fact, modified C&H patterns have applications in all time frames, from intraday scalping to monthly market timing. There isn’t a stock scanner setting you can use to find a cup and handle pattern, but the pattern is easy to recognize visually. If you set your stock scanner to meet your other trading needs, then you can flip through the results until you find a chart that looks like a cup and handle. For example, a day trader may scan for stocks with a high average true range (ATR), and a swing trader might search for stocks that have performed well in recent weeks.

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This is a powerful chart pattern that’s used by stock traders to capture explosive breakout moves — where the stock price could increase 1000+% within a few years. Traditionally, the cup has a pause, or stabilizing period, at the bottom of the cup, where the price moves sideways or forms a rounded bottom. It shows the price found a support level and couldn’t drop below it. It helps improve the odds of the price moving higher after the breakout. See the second big bearish candle, which reaches the second target.