Cup And Handle Chart Patterns

It’s all so you can ask questions, get answers, and find your market groove. If you can see what other traders are seeing and determine how they are thinking, you can make smarter decisions and trade more effectively. One of its limitations is the ambiguity of the pattern formation. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism.

This resistance line works as the support level of a prior uptrend, and once the asset starts dipping (forming the left side of the cup), the weaker hands start moving out. When this pattern comes about a handle is formed on a cup, and most often Cup and Handle Pattern it is in the shape of a triangle. The ideal position to buy is when the price breaks above the top of the shape taken by the handle. As soon as the price moves out of the handle, the pattern is complete and the underlying asset/stock may rise.

Cup and Odd Handle

If the prices break this resistance line, the bullish trend might just continue. The cup and handle pattern is one of the rare sighters that can actually validate the likelihood of a price surge. Here’s what you need to know, from the pattern’s anatomy, identification strategies, and complementing indicators, to real-time examples showing the best ways to trade the pattern. The cup-and-handle pattern may form over the course of a day, weeks, months, or even a year.

More aggressive buyers can enter when the bottom of the cup is in — provided that the asset is holding strongly to the key support levels near the bottom. A good strategy here would be to check for a bullish RSI divergence or a golden crossover to ensure that the bottom is in and the cup will move to the right. If you are a position trader, the idea should be to look for this chart pattern on the weekly or even monthly timeframe. Swing traders can look at daily or weekly timeframes to make accurate calls. And even though it might also work for scalping — via the minute and hourly chart — the reliability decreases here. The handle formation represents a last-ditch effort from a handful of sellers to push the prices down.

What is the Cup and Handle Pattern?

However, it can decline as well, which is why a stop-loss is needed. However, it fails to continue increasing in price and instead reverses and trends downward. The cup-and-handle candlestick pattern starts with the formation of the “cup, which looks like a bowl. The two sides of the cup are not always the same height but in a perfect scenario they would be. Once the cup forms, the stock price pulls back, forming a “handle” out to the right of the cup.

This can help you gauge the overall market trend, only to tell if the pattern formation is going in the right direction or not. If you are viewing the pattern on a daily chart, make sure that as the cup and handle pattern forms, the price levels are always above the 50-day or the 200-day moving averages. The cup and handle chart pattern does have a few limitations. Sometimes it forms within a few days, but it can take up to a year for the pattern to fully form. Secondly, you need to learn to identify the length and depth of a true cup and handle, as there can be false signals. The longer and rounder the bottom, the stronger the signal.

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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. The anatomy of a cup and handle formation is crucial as it allows you to identify the chart formation and plan a trading strategy accordingly.

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Lastly, illiquidity also restricts the cup and handle from fully forming as trading volume also affects an asset’s price. Finally, the cup and handle formation is relevant across timeframes. For instance, if you are in the market for a short-term price movement, you can look at this chart pattern in a 1-hour or a 4-hour timeframe.

• The cup is shaped like the letter “u” on the price chart, and the handle is slightly skewed downward.
• O’Neil is the innovator of the CANSLIM method and one requirement was that the stock must form some kind of a cup and handle pattern.
• It was developed by William O’Neil and introduced in his 1988 book, How to Make Money in Stocks.
• 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.
• Out of these, the cup and handle defines market psychology in the best possible way and is one of the easiest patterns to read.
• The cup and handle is considered a bullish signal, with the right-hand side of the pattern typically experiencing lower trading volume.

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. Take https://www.bigshotrading.info/ 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.