The trading range depicted by the handle alone helps risk-averse traders create a solid risk management strategy. The handle mostly trades in a channel and therefore comes with clear stop-loss exit points in case the formation steers from the normal path. Simply put, if the cup and handle formation becomes invalidated, it is easy to tell. This is followed by a sideways pullback between the high and low of the cup shape, forming the handle. However, as with any trading pattern, a cup-and-handle pattern does not guarantee the stock price will continue on a bullish trajectory, it’s just a trading indicator.
It all depends with the price move before the formation of the pattern. Price Data sourced from NSE feed, price updates are near real-time, unless indicated. Technical/Fundamental Analysis Charts & Tools provided for research purpose. Please be aware of the risk’s involved in trading & seek independent advice, if necessary.
Cup and Handle Pattern: How to Trade and Target with an Example
There are several benefits of using the cup and handle pattern. First, it is a relatively easy pattern to identify in a chart. Second, you don’t need to use any technical indicators like the RSI and moving averages. The cup and handle pattern is regarded as a bullish signal, and lower trading volume is frequently seen on the right side of the pattern.
With this trading strategy, you may reduce your risk compared to other strategies and generate a considerable return on capital. It is a bullish continuation pattern which means that it is usually indicative of an increase in price once the pattern is complete. 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. For mid-term analysis, a daily chart pattern and price breaks make sense. And for defining a broader trading strategy, chart formation on the weekly chart can also offer vital insights.
Is the cup and handle pattern bullish?
Once you spot a chart with a Cup With Handle pattern, it’s best to wait for price to break out of the handle before entering a long position. If a cup and handle forms and it is confirmed, the price should see a sharp increase in the short- to medium-term. The take profit targets for the Cup & Handle corresponds to the two targets we mentioned Cup and Handle Pattern earlier. Your first take profit target should be located on a distance equal to the size of the handle, starting from the breakout point. If this target is completed, you can then start pursuing the next target. The second target is located on a distance equal to the size of the cup, applied again from the moment of the breakout.
- With a typical breakout entry above the handle high, your stop loss should be not more than 7% to 10% below your entry price.
- The bearish cup and handle chart pattern is an inverted version of the classic cup and handle chart pattern.
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- For example, a day trader may scan for stocks with a high average true range (ATR), and a swing trader might search for stocks that have performed well in recent weeks.
- That way, you can enter mid-way even if you miss the surge from the bottom.
The second target equals to the size of the cup, applied downwards starting from the moment of the breakout. Price action is an important and common trading strategy that traders use to identify entry and exit positions. This includes drawing trendlines for the handles to highlight the breakout points, notes to mark important areas, or arrows to highlight potential entry and exit points.
Inverted/reverse cup and handle patterns
You don’t have to exit the trade when the price action is moving in your favor, showing the potential of adding more profit to your trade. This acted as a confirmation of the bearish cup and handle pattern. The above graphic shows both the cup and the handle part of the cup and handle chart pattern.
Most of the same general rules, such as the handle not exceeding 1/3rd of the cup, still apply. The price of the asset is expected to drop after the pattern formation is complete. This prior trend is important as is the duration https://www.bigshotrading.info/ of the trend. After completing the cup pattern, a trading range develops on the right side and the handle is formed. When price breaks out of the handle’s trading range, it signals a continuation of the prior trend.
Our daily swing trading report, The Wagner Daily, also highlights top cup and handle patterns as they develop. When the handle is completed, a breakout from the handle’s trading range signals a continuation of the prior advance. The breakout from the handle’s trading range signals a continuation of the prior uptrend.
- You can also see that the two targets have been applied from the moment of the breakout.
- In the above chart example, you can see how the stock made a nice round cup and had a strong handle, before continuing higher.
- The confirmation of the pattern comes when the price action breaks the channel of the handle in the bearish direction.
- When price breaks out of the handle’s trading range, it signals a continuation of the prior trend.
- Finally, one limitation shared across many technical patterns is that it can be unreliable in illiquid stocks.
- Sometimes, the left side of the cup is a different height than the right.
Early entries can benefit from tighter stops, such as several percent below the downtrend line or 20-day moving average (depending on the basis of your entry). With a typical breakout entry above the handle high, your stop loss should be not more than 7% to 10% below your entry price. Proper technical analysis puts the odds of winning in your favor, but you must always be prepared to cut your loss if the pattern fails.