Cup and Handle Pattern: Meaning with Example

In the diagram below, I illustrate the 2 different types of cup and handle patterns. The cup and handle is an accumulation buying pattern, which is found during long periods of consolidation, and can lead to powerful explosive moves once the pattern is fully completed. ✅This pattern is not as popular among traders as “Head and Shoulders”, “Double Top” and other classic patterns of technical analysis. In fact, the “Cup & Handle” pattern is in no way inferior to the above patterns in its reliability and, if used correctly, can bring considerable benefits to the…

It’s important to note that the size of the pattern really matters.

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• Whatever the height of the cup is, add it to the breakout point of the handle.
• The final sell-entry (see sell #2) would be at the breakout of the cup’s lows, as seen in the chart above.
• So whenever you see a buildup of higher lows into resistance, it’s a sign of strength.
• As mentioned, we may see triangles, or we may also see trading ranges or channels.
• Image by ColibriTrader.comThis ExxonMobil chart below shows an inverted cup pattern from January through May as new highs failed to hold and price went lower after the peak.
• William J. O’ Neil in his book, “How to Make Money in Stocks” presented the Cup and Handle pattern.

A common way to set a stop loss is hiding the order below the handle’s low. There’s nothing mystic around technical analysis (TA) – the chart patterns repeat due to the same psychological tendencies that people have had. No one can explain how to trade cup and handle pattern better that way you have explained in this short article. If you trade chart patterns, https://www.bigshotrading.info/ you want to exit your trade when the pattern is completed. The good thing with a buy stop order is your entry will just be above the highs of the “handle”, and if the breakout is real, that’s one of the best prices to get in. Finally, when the price breaks out of Resistance, the cup and handle pattern is “confirmed”, and the market could move higher.

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Make sure the downtrend is of the same time

frame in which you’re looking for the inverted cup and handle. After the downtrend starts to retrace, the

setup forms in two parts – the cup and the handle. Cup and handle appears in an uptrend, serving as a trend continuation pattern, coming back to the significant high after a correction.

Your actual trading may result in losses as no trading system is guaranteed. 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. Prior to the decline that started the cup and handle pattern, the price had advanced about 30% over several months. The upward momentum carried through following the cup and handle. Opponents of the V-bottom argue that prices don’t stabilize before bottoming and believe the price may drop back to test that level.

What does an inverted cup and handle mean?

The pattern is considered valid when a downward breakout occurs and the price closes below the support or neckline. Day trading an inverse cup and handle pattern can be very profitable if you know what you’re doing. If the market sentiment is weak, the chances of the trade working is much lower as compared to taking a position in a market uptrend.

The inverted cup and handle forms in a downtrend – when the market keeps making new lower lows and lower highs. Like all technical indicators, the cup and handle should be used in concert with other signals and indicators before making a trading decision. Specifically, with the cup and handle, certain limitations cup and handle reversal have been identified by practitioners. The first is that it can take some time for the pattern to fully form, which can lead to late decisions. Even though many consider the cup and handle patterns best for medium to long-term strategies such as the swing trading strategy, they also work on shorter timeframes.

What Does a Cup and Handle Pattern Tell You?

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. The stock would break out of the handle because the inverted cup and handle are a bearish pattern. The handles fail, so make sure you know what the candlesticks forming the handle tell you. A cup and handle is a technical indicator where the price movement of a security resembles a “cup” followed by a downward trending price pattern.

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. Second, the security will retrace, dropping no more than 50% of the previous high creating a rounding bottom. Third, the security will rebound to its previous high, but subsequently decline, forming the “handle” part of the formation.