What Is a Cup and Handle Pattern?
A cup and handle price pattern on a security’s price chart is a technical indicator that resembles a cup with A take care of, in which the cup is withinside the form of a “U” and the take care of has a mild downward drift.
The cup and handle is considered a bullish signal, with the right side of the pattern usually experiencing less trading volume. Pattern creation can take as little as seven weeks or as long as 65 weeks.
What Does a Cup and Handle Pattern Tell You?
American technician William J. O’Neill defined the Cup and Handle (C&H) pattern in his 1988 classic, How to Make Money in Stocks, adding technical requirements through a series of articles published in Investor’s Business Daily, which he co-wrote in 1984. Was established. O’Neill included timepiece measurements for each component, as well as a detailed description of the rounded lower parts that give the pattern its unique teacup appearance.
As the stock forming this pattern tests old highs, it is likely to face selling pressure from investors who previously bought at those levels; Prices are likely to consolidate with a downtrend for a period of four days to four weeks before rising due to selling pressure. A cup and deal with is taken into consideration a bullish continuation sample and is used to discover shopping for opportunities.
It is worth considering the following when tracing the cup and handle pattern:
Length: Generally, cups with longer and more “U” shaped bottoms provide a stronger signal. Avoid cups with pointed “V” bottoms.
Depth: Ideally, the cup should not be excessively deep. Also avoid handles that are too deep, as the handles should be formed in the upper half of the cup pattern.
Volume: Volume should decrease as prices decline and remain below average in the base of the bowl; It should rise when the stock starts to extend its move higher, moving back up to test the previous high.
Retesting previous resistance does not require touching or coming within several ticks of the old high; However, the further away the top of the handle is from the high, the more significant the breakout will be.
How to Trade
There are many ways to trade Cup and Handle, but the most basic way is to enter a long position. The image below shows a classic cup and handle structure. Place the stop buy order slightly above the upper trend line of the handle. Order execution should occur only when the price breaks the resistance of the pattern. Traders may experience excessive slippage and enter false breakouts by using aggressive entry.
Alternatively, wait for the price handle to close above the upper trend line, subsequently place a limit order slightly below the breakout level of the pattern, try to get execution if the price retraces. If the price continues to rise and does not reverse, there is a risk of losing the trade.
A profit target is set by measuring the distance between the bottom of the cup and the breakout level of the pattern and moving that distance upward from the breakout.For example, if the gap among the lowest of the cup and the manage breakout levelis 20 points, the profit target is placed 20 points above the handle of the pattern. Stop-loss orders can be placed either at the bottom of the handle or at the bottom of the cup, depending on the trader’s risk tolerance and market volatility.
Example Trading
Now let’s consider a real-world historical example using Wynn Resorts, Ltd. (WYNN), which went public on the Nasdaq exchange in October 2002 at around $13 and rose to $154 five years later.
The subsequent decline ended within two points of the initial public offering (IPO) price, which was far more than O’Neill needed for a shallow cup high in the prior trend. The recovery wave reached a previous high in 2011, almost 10 years after the first printing.
The handle follows the classic pullback expectation, finding support at the 50% retracement in a round shape, and returning to the high for the second time after 14 months. The stock broke out in October 2013 and added 90 points over the next five months
Limitations of the Cup and Handle Pattern
Like all technical indicators, cups and handles should be used in conjunction with other signals and indicators before making trading decisions. In particular, with the cup and handle, some limitations have been identified by physicians. The first is that the pattern may take some time to fully form, which may delay decision making. While the typical time frame for a cup and handle to form is one month to one year, it can also happen very quickly or take several years to establish itself, making it unclear in some cases.
Another issue concerns the depth of the cup portion of the formation. Sometimes a shallow cup can be a signal, while sometimes a deep cup can produce a false signal. Sometimes the cup is made without a specific handle. Finally, a limitation shared by many technical patterns is that it can be unreliable in illiquid stocks.
What does the cup and handle pattern indicate?
In conclusion, the cup and handle chart pattern is a powerful tool in the arsenal of any trader. Its ability to signal trend reversals and continuations makes it invaluable for making informed trading decisions. Remember to combine this pattern with other technical and fundamental analysis tools for a comprehensive trading strategy.
How do you find the cup and handle pattern?
Consider a scenario where a stock recently hit a high after significant momentum, but has since corrected, losing about 50%. At this point, an investor may buy the stock, anticipating that it will bounce back to previous levels. The stock then rebounds, testing previous higher resistance levels, after which it falls into a sideways trend. In the final phase of the pattern, the stock surpasses these resistance levels, and rises more than 50% from the previous high.
What happens after the cup and handle pattern is formed?
If a cup and handle is formed and confirmed, the price should see a sharp rise in the short to medium term. If the pattern fails, this uptrend will not be seen.
What is the goal of the cup and handle pattern?
The goal 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 that extend an uptrend.
Is the Cup and Handle Pattern Bullish?
As a wellknown rule, cup and manage styles are bullish rate formations. William O’Neill, the founder of the term, identified four primary stages of this technical trading pattern. First, about one to three months before the “cup” pattern begins, a security will reach a new high in an uptrend. Second, safety will return, falling no more than 50% of the previous high, forming a circular bottom. Third, the security will reach its previous high but subsequently decline, forming the “handle” part of the formation. Finally, the safety is broken again, surpassing its height, which is equal to the depth of the lowest point of the cup.
