Cup And Handle Pattern Rules


Thomas Bulkowski’s backtests are also lacking strict buy and sell rules, and he argues the cup and handle strategy is inferior to many other patterns. In this article, we backtest the cup and handle pattern strategy. Because the cup and handle pattern is difficult to define with strict buy and sell rules, we refer to other research. What should you do if volume on breakout day is much lighter than usual? Light volume in the market in general may also be a factor. Also consider that the breakout may have started later in the day.

cup and handle pattern rules
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For one, the pattern is relatively easy to identify on a chart thanks to its distinct teacup shape. Second, it is a relatively accurate and reliable bullish continuation indicator. And lastly, it can be a fairly reliable standalone signal tool, though it is always better to utilize other technical indicators for more accurate trend confirmations.

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Cup and Handle Chart Pattern: How To Use It in Crypto Trading

As its name implies, the pattern consists of two parts — the cup and the handle. Further down in the article we have several charts to show how it looks like in a chart. A cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities. No technical pattern works all the time, which is why a stop-loss is used to control the risk on trades that are less efficient.

  • Traders rely on a stop-loss order to get them out of a trade in such situations.
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  • An “inverted cup and handle” is a bearish pattern, triggering a sell signal.

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. How do you trade a head and shoulders pattern bullish in a stock market and make profits? andhigh-performing growth stocksgenerally form cup and handle patterns during their bull runs. The forming of this pattern allows the stock to base or take a “breather” before its next move up and is seen as healthy action. Cup and handle patterns seen in bear markets are generally not as reliable. An inverted cup with handle pattern is forming down towards the 200 EMA.

Simple Cup and Handle Trading Strategies

As the name suggests, the pattern is made up of two sections; a cup and handle. The cup pattern happens first and then a handle happens next. The cup is formed after an advance and looks like a bowl or rounding bottom. The pattern starts when a stock’s price runs up, then pulls back to form a cup shape. After that, a handle forms, which is a slight downward drift in the stock’s price.

The should also be less than two-thirds the length of the cup below it. You may want to test the environment with virtual money with a Demo account. Once you are ready, enter the real market and trade to succeed.

As can be seen in the picture above, the handle is the correction of the price to the right side of the cup. As a rule, such a correction takes the form of a flag pattern. Visually, the handle starts where the right side of the cup ends. An indispensable condition is the correction depth which is less than 50% of the right wall of the cup. Any retracement more than 50% invalidates the cup and handle formation. With over 50+ years of combined trading experience, Trading Strategy Guides offers trading guides and resources to educate traders in all walks of life and motivations.

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The pattern is formed by a drop, a rally, then another drop back to where the rally started. A handle forms, which should be less than a third the size of the cup. I show this as the blue line extending down from point A on the chart to the right.BuyBuy when price closes above the right cup rim .StopThe handle low is a good place to put a stop.

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A good example of and handle pattern at work is to look at the long-term chart of gold. Further, the pattern tells you not to worry when the price reaches at the resistance and either consolidates or starts retreating. The high points of the cup and the handle are aligned on the same horizontal resistance line. This line is called the neck line of the cup with handle pattern. From the chart, you can see that the price formed a cup between June and October 1999.

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.

The standard cup and handle pattern is a bullish signal, but there is also a bearish version of this pattern called “Inverse Cup and Handle” pattern. However, note that cup and handle pattern failure may occur more frequently in overall bearish markets. Always use stops to minimize risk in case of a failed cup and handle pattern. Commodity and historical index data provided by Pinnacle Data Corporation. Unless otherwise indicated, all data is delayed by 15 minutes. The information provided by, Inc. is not investment advice.

If there are no strong opponents, one may safely enter a buy position. In the course of the first Introductory stage, a reversal pattern forms. The second top is lower than the first top here, which allows drawing a descending trend line. Theoretically, a bullish market is supposed to reverse and go down.

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We explore the cup and handle pattern, as well as the inverted cup and handle, and show you how to trade when you recognise these patterns. Since that introduction, the cup and handle has been elaborated on, including by O’Neill himself. Over a series of articles in the early 1990’s, O’Neill defined technical requirements for the designation of the pattern formation. The reasoning behind this explanation is that the breakout move requires strong volume after the necessary quiet period to form both the cup and the handle. You can’t find a more quite time to trade the markets than late afternoon when everyone is off at lunch or have finished trading for the day. The cup and handle pattern is a pattern that traders use to identify whether the price of an asset will continue moving upwards.

This drop, or “handle” is meant to signal a buying opportunity to go long on a security. When this part of the price formation is over, the security may reverse course and reach new highs. Typically, cup and handle patterns fall between seven weeks to over a year. The cup and handle pattern is generally seen as a bullish pattern and can be used by traders to identify potential buying opportunities. The pattern is created when the stock price forms a “cup” shape, followed by a brief dip (the “handle”). Ideally, a handle should form no more than 15% below the left high of the cup and should slope downwards, not upwards.

A cup and handle is considered a bullish signal extending an uptrend, and it is used to spot opportunities to go long. The main reason for this is that bear markets are characterized by high levels of fear and uncertainty and investors tend to sell on any break-outs or rallies. This selling pressure creates a hard environment to gain traction after a cup and handle breaks out to the upside. Another evidence that you discovered the right pattern is the trading volume that is lowering at the stage of the Handle’s formation. It signals that big buyers are testing the power of their opponents.

You will get answers to these and other questions in this article. Learn all about the Bull Flag pattern, its features, how to identify it in the chart and how to use it correctly when trading on Forex. The system allows you to trade by yourself or copy successful traders from all across the globe.

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Volume that dries up at the bottom suggests funds lost interest in selling. U-shaped bases are more likely to work than ones that are V-shaped. The pattern has better odds of success if the stock had a previous uptrend leading into this pattern showing historical demand and accumulation. Cup and handle patterns are not good probability trades if the general market is in a correction or a bear market. Make sure you also don’t miss our amazing Triple Top Chart Pattern Trading Strategy which is the ultimate reversal trading strategy that you can have in your trading arsenal. Use the same rules – but in reverse – for a SELL trade, but this time we’re going to use the inverted Cup and Handle pattern.

The subsequent recovery wave reached the prior high in 2011, nearly 10 years after the first print. Kiril Nikolaev studied Business with a major in Finance at York University, and worked as a financial analyst at BMO Nesbitt Burns. Kiril has been writing financial and investment-related content for over 5 years and has been featured many financial websites. Kiril is a CFA charterholder with over 10 years of investing experience.

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