He has been adding technical requirements through a series of articles published in Investor’s Business Daily, which he founded in 1984. Following his principles, traders using the pattern should place a stop buy order slightly above the upper trendline of the handle part of the pattern. That recovery swing may end at the old high or exceed it by a few points and then reverse, adding downside fuel because it traps two groups of buyers. First, longs entering deep in the pattern get nervous because they were betting on a breakout that fails.
The handle is formed inside the trading range (on the right side of the cup) when prices fail to reach the previous high, and pull back down to re-test the support line once again. The entry point for a cup and handle pattern is to buy when the price moves above the handle formation. This is made simpler by using a drawing tool and waiting for the price to move up and out of the drawn handle pattern. A stop-loss can be placed below the low price point in the handle.
Example Trading the Cup and Handle
You’ll see how other members are doing it, share charts, share ideas and gain knowledge. After the downtrend made a significant low, the subsequent retracement forms the cup. Ideally, the cup should retrace not more than half of the proceeding down move. In the daily chart above, the down-sloping 50-day MA (the blue line) confirms the downtrend. It takes an effort to find the pattern, where all of its parts match strict criteria – there are quite a few!
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. However, sometimes, the market closes cup and handle reversal much higher and you get a poor entry point. Hence, it is more prudent to only enter this setup during the handle formation, especially if previous attempts have been made to break the resistance.
Volume pattern
Inverted cup and handle patterns are also possible during downtrends and signal bearish continuations. In this case, the cup shape is inverted such that it represents a resurgence in price after a downtrend followed by a downward movement. 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.
IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority. That’s to say, you can use volume as a way to confirm a breakout. Similar to the Relative Strength Index (RSI), the stochastic also indicates overbought and oversold conditions of the market. We’ll consider going short once the price has closed below the EMA 20. So make sure you don’t forget to place a stop-loss order above the top of the handle.
What Is The Cup & Handle Pattern & How To Trade With It
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. The target with the cup and handle pattern is the height of the cup added to the breakout point of the handle. Generally, these patterns are bullish signals extending an uptrend. 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.
- Midway through October, the flag formed a consolidation area, which became a bear flag.
- You can see the cup and handle pattern that formed between 2005 and 2007.
- Traders take their long positions when the price breaks the resistance level.
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- A common way to set a stop loss is hiding the order below the handle’s low.
Cup and handle patterns are found on all timeframes, from intraday charts up to weekly and monthly charts. The above EUR/USD daily chart shows an inverse cup and handle pattern. Based on this strategy, the cup and handle chart formation is already valid, which means you can enter a short-selling position aiming for a retest at the cup’s neckline support level. The first way to trade the inverse cup and handle pattern is to look for a trend direction reversal. As the chart pattern indicates a bearish trend reversal, your goal is to enter a short position immediately after identifying this unique formation. The reverse cup and handle pattern is an upside-down cup followed by a handle and a breakout to the downside.
As you can see from the chart below, we have a reverse cup and handle pattern forming on ENJ/USDT for around 2 weeks from early February. The downward breakout is confirmed when prices close below the support line that marks the bottom of the cup. In this article, you’ll learn how to trade the inverted cup and handle step by step so that you can maximize your profits while minimizing your https://www.bigshotrading.info/ risks. If it looks bullish on 15-minute chart and it has been on a downtrend in the daily chart – then, ideally, you should not take the trade. Institutional investors (big players) would want to book profits, this brings the price of the stock down. The ‘Cup and Handle’ is a pattern which forms on the chart when a rising stock – goes through both price correction and time correction.
It’s the opposite of a cup and handle pattern, which is bullish. When the price fails the base of the cup, it’s considered a bearish signal. Midway through October, the flag formed a consolidation area, which became a bear flag.