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. William O’Neil’s CANSLIM method shows better performance than the overall market (S&P 500) in backtests, even though it has lagged in recent years. Although we might argue O’Neil is the innovator of the cup and handle strategy, it’s just one part of many in his methodology.

1. The security bounces and tests the high, drawing in aggressive short-sellers who believe that a new downtrend will elicit a double top breakdown.
2. In most cases, the decline from the high to the low of the handle shouldn’t exceed 8%–12%.
3. Yep, this is a bullish pattern and can be a technical indicator for traders of a potential upcoming breakout.
4. A minimum of three swing high peaks are needed to draw the resistance line correctly.

The cup and handle pattern books to learn from are How to Make Money in Stocks by William J. O’ Neil and Encyclopedia of Chart Patterns by Thomas N. Bulkowski. In this pattern, the cup part is similar to the U shape and followed by a smaller U or V shape pattern, known as a handle. The handle should be smaller than the cup and the neckline of both should be at even level. The stop loss should be placed below the trough or bottom of the handle pattern (between 7600 and 800). At last, here the target should be exactly the downfall percentage in the opposite direction (between 10800). In the above example, the target is set in the exact percentage of downfall that occurred in the cup pattern.

It topped out at $41.66 in April and pulled back to the 38.6% retracement of the last trend leg. Price carved out a choppy but rounded bottom at that level and returned to the high in best tobacco stocks June. It then ground sideways in a consolidation pattern (first blue box) that lasted for more than five weeks, or close to half the time it took for the cup segment to complete.

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 pattern starts when a stock’s price runs up, then pulls back to form a cup shape.

Ask a question about your financial situation providing as much detail as possible. Your information is kept secure and not shared unless you specify. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. A trailing stop-lossmay also be used to get out of a position that moves close to the target but then starts to drop again. If the stop-loss is below the halfway point of the cup, avoid the trade. The traditional buy point is a breakout above the high of the handle, which clearly puts bullish momentum on your side.

How Do You Find a Cup and Handle Pattern?

Finally, one limitation shared across many technical patterns is that it can be unreliable in illiquid stocks. 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 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.

Examples of the Cup and Handle Pattern

Bulkowski also ranked the cup and handle as #3 out of 39 chart patterns analyzed based on its overall success rate. According to O’Neil’s description, the handle should extend no longer than between one-fifth to one-quarter of the cup’s length. Note that a deeper handle retracement, https://bigbostrade.com/ rounded or otherwise, lowers the odds for a breakout because the price structure reinforces resistance at the prior high. A conservative price target can be achieved by measuring the height of the handle and adding it above the resistance level at the top right-side of the cup.

The pattern is a bullish continuation formation that marks a consolidation period, with the right-hand side of the pattern typically experiencing lower trading volume. The cup part of the pattern forms after a price rally and looks like a gradually rounded bottom of a bowl. It is a bullish continuation pattern which means that it is usually indicative of an increase in price once the pattern is complete. A cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities.

Conclusion: Mastering the Cup-and-Handle Pattern for Effective Trading

It occurs when the stock price has been decreasing then follows another rise after the decrease. This formation comes from how some traders use momentum strategies to trade patterns and trends seen on the chart. Just like any pattern the cup and handle alone is not a guarantee of an uptrend continuation or initiation.

Then, the trader should target a 2% up move in the price from the breakout point at the neckline. In the above example, the cup and handle pattern is easily traceable. Now after recognizing the pattern, you need to learn how to trade in this. Here, you need to take entry at the breakout point that comes after the completion of the handle pattern at the neckline (near 8800). The neckline is the resistance point from where the price tries to go downwards in the pattern. Utilize popular charting platforms like the PrimeXBT trading platform, TradingView, StockCharts, or MetaTrader, which offer a wide range of technical analysis tools and indicators.

What are the limitations of Cup-And-Handle Pattern?

The Inverted cup and handle, on the other hand, provide traders with a unique perspective to the traders on the flip side. Both patterns give traders a risk mitigation area, as well as specified zones and starting points. This helps traders in making informed trading decisions and helps them avoid losses. The handle serves as a final period of consolidation before the potential breakout.

The cup and handle pattern’s lowest win rate is the 1-second price chart with a 43% win rate. The cup and handle pattern most popular indicator used is the volume indicator which helps measure the strength of a cup and handle pattern breakout. This example is best for stock traders seeking to trade a cup and handle. Secondly, plot the handle component which involves drawing a smaller rounded U shape from left to right that connects the swing low prices together. Fourthly, the pattern price breakout formation involves the price rising through the resistance area and continuing to increase higher. The cup has an inverted “U” shaped pattern made by consecutive highs followed by consecutive lows in the candlestick chart.

In trading and investment, this pattern helps in knowing when the up move in the price is about to come. If the pattern is formed per its set structure and demand and supply, then there are chances that upmove can come. The target of the Cup and Handle pattern is the height of the cup added to the breakout of the resistance trend line connecting the two highs of the cup. To trade the Cup and Handle pattern, traders typically wait for the price to break through the upper trendline of the handle with a strong volume surge. The Cup and Handle pattern is a bullish chart pattern that can provide traders with valuable insights into the market’s psychology. PrimeXBT products are complex financial instruments which come
with a high risk of losing money rapidly due to leverage.