The above EUR/USD daily chart shows an inverse cup and handle pattern. Based on this strategy, the cup and handle chart formation is already valid, which means you can enter a short-selling position aiming for a retest at the cup’s neckline support level. The second example is another classic cup and handle pattern that develops over three to four months, with the handle forming over approximately two weeks.
The handle slopes upwards before breaking out sharply downward to continue the original bearish trend. If you look at the regular cup and handle pattern, there is a distinct ‘u’ shape and downward handle, which is followed by a bullish continuation. This means the inverted cup and handle is the opposite of the regular cup and handle.
What is Cup-And-Handle Pattern?
Many traders make the mistake of buying oversold stocks or selling overbought stocks and suffer financial losses as a result. This often happens when traders are unaware of the proper analytical tool to use. As the name indicates, the continuation pattern highlights the continuation of the current bullish or bearish trend after a brief pause.
The points where the price fell and rebounded form a “u” shape, representing the cup. The formation is then followed by a small consolidation or slight pullback with a small downward drift, representing the handle. The Cup and Handle pattern is a technical indicator that traders use to identify whether the price of a traded security will continue its upward movement.
Example Trading the Cup and Handle
The daily and weekly charts at both Investors.com and MarketSmith make heavy turnover easy to spot. Simply compare the day or week’s volume with the moving average line drawn across the volume bars. An Investors.com Cup and Handle Pattern chart will also tell you in real time how volume is running in comparison with typical level at that time of the trading session. Scan, and set Alerts for patterns in real-time for ANY asset in your watchlist.
Chart patterns are formations that appear on a stock’s price chart and often repeat themselves. Volume is the number of shares that change hands each day and can be used to confirm breakouts and trends. One of the major benefits of using AI-driven technical analysis tools like TrendSpider is the ability to backtest historical data. This allows traders to compare the performance of their strategy over different periods and markets.
How to Spot the Upside Down Cup and Handle Pattern
An inverted “cup and handle” is used to identify selling opportunities, which is a sign of an upcoming bearish movement. This pattern moves in the opposite direction to the cup and handle, forming an “n” shape and an upward handle. However, as previously mentioned, you must confirm the reversal with other trading tools. For example, you can use technical indicators, support and resistance levels, and trading volume indicators to get extra confirmation that a reversal is likely to occur. 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.
A breakout above resistance signals that an uptrend may continue onto further gains. Many analysts look for confirmation of a strong buy signal in the form of a volume spike. Cup and handles allow traders to enter a position at the start of a new strong uptrend, thus maximizing profits. Additionally, they give traders confirmation that a bull trend is likely to continue. Two decades of research by Tom Bulkowski show that after a cup and handle pattern is confirmed on a break of the neckline on higher volume, the price increase averages +54%. The chart above shows that the height/depth of the cup and handle is equal to the price target.
Market participants should not take it as a holy grail indicator, as the profitability of each strategy can vary heavily according to market conditions. You can open an FXOpen account and try out the reverse cup and handle pattern with different sets of indicators in a live market. Shares and stock indices with lots of upward momentum prior to the cup and handle forming tend to produce the most favourable cup and handle patterns for trading.
- That’s why it’s crucial to set up stop-losses before initiating your trades.
- 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).
- The cup and handle is a powerful and reliable chart pattern of technical analysis that frequently leads to big gains.
- A cup-and-handle pattern is the name of a chart pattern used in technical analysis that describes a bullish continuation trend in the price of a security, typically a stock.
- For additional confirmation, look for the bottom of the cup to align with a longer-term support level, such as a rising trendline or moving average.
Proper risk management techniques are crucial to limit losses and maximize profits during any trade. Twenty years of trading research show the cup and handle pattern has a 95% success rate in bull markets and returns an average profit of +54%. The cup and handle chart pattern is reliable and accurate but can be difficult to identify.
What should traders look for in Cup-And-Handle Pattern?
This means that the handle of a cup and handle is considered a strong indication that the stock is poised for growth. Some patterns emerge during day trading, forming over the course of hours, while others can take shape over the better part of a year. Often the asset’s price will remain at its low point for weeks or even months before recovering its value.
What is the psychology behind the cup with handle?
Cup and Handle Pattern Psychology
You can see how volumes and fear of price fall can cause great up-and-down swings in a stock price. In the cup and handle pattern, as the stock price moves upwards, there is selling pressure among investors who want to consolidate their profits at new highs.
A Cup and Handle price pattern is a technical chart setup that resembles a cup with a handle. The cup has a “u” shape, and the handle is a slight downward correction. Typically, the “cup and handle” is a bullish pattern and can be considered a continuation and reversal formation.