For traders scanning for a stock on the verge of a breakout, one of the signs to find is a classic cup and handle pattern. This pattern takes some time to develop, but is well-liked among traders because it can be defined by specific, measurable price movement parameters and offers an excellent risk to reward ratio. This article will cover the basics of the cup and handle pattern and introduce the key points to consider when trading the pattern. As an award-winning futures broker, NinjaTrader provides deep discount commissions and unmatched support.

cup and handle reversal

You can even adjust your stop loss order right above the upper level of the zone. The confirmation signal of the figure comes at the moment when the price action breaks the handle downwards. After the bearish Cup with Handle signal, you can start pursuing the bearish potential of the pattern.

How To Enter And Exit This Powerful Pattern

Here’s how you can scan for the best undervalued stocks every day with Scanz. Check out this step-by-step guide to learn how to scan for the best momentum stocks every day with Scanz. Look for an inverted ‘U’ shape and volume that dries up near the cup’s high. Volume that dries up at the top suggests funds lost interest in buying.

You have the option to close your entire position at this second take profit target. However, you could opt to hold a portion of the trade for further gains if you see price action continuing to trend upwards. The yellow line on the chart is an upward trend line, which measures the bullish cup and handle chart pattern activity of the price action. You could hold the trade as long as the price action is located above the yellow bullish trend line. The break through the trend line is shown in the red circle on the chart, which would signal an opportune time to close out the trade in its entirety.

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  • When this pattern is complete it is usually a signal for a bullish trend reversal.
  • We also offer a chart scanner with pattern recognition software that works automatically to detect and highlight trends for your ease of trading.
  • Today we will talk about a somewhat lesser known pattern but one that is still highly effective.
  • While sellers try to push the contract, buyers resist the downward trend.

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Gold just moved to the November 2011 high and in today’s pre-market trading it even moved above it. The cup portion of the pattern is shaped like the letter «U» with both sides of the cup having equal sides. Most traders will wait for a breakout above/below the line of resistance/support as a confirmation that the trend is resuming, and enter a position in the same direction. The cup hits the support level and has a minor correction that forms the handle. Once the handle completes and the pattern doesn’t break down, the stock will fall down further. The cup bottom forms a pretty important resistance level because it’s on top.

Is a head and shoulders pattern bullish?

The head and shoulders chart is said to depict a bullish-to-bearish trend reversal and signals that an upward trend is nearing its end. Investors consider it to be one of the most reliable trend reversal patterns.

The cup and handle tells you that the price will continue with its bullish trend. It also tells you where to expect the initial resistance level. This resistance happens at the level where the price reached and started falling. The cup and handle pattern is part of the so-called continuation patterns. Other such patterns are the ascending and descending triangle pattern and bullish and bearish flags and pennants.

So, What Is A Price Pattern?

Now, you don’t want to put your stop loss at the exact low of the handle because the market could trade into that area of value and reverse higher. And when the trading setup is “destroyed”, the reason to stay in the trade is no more. The good thing about waiting for the close is it’s less prone to false breakout. Because this is a sign world currencies of strength telling you there are buyers willing to buy at these higher prices. He is the most followed trader in Singapore with more than 100,000 traders reading his blog every month… If you have already taken a position using Strategy #1 on the pre-breakout, you can also use Strategy #2 to add more positions on the first pullback.

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A double bottom chart pattern can point to a tug of war between buyers and sellers. While sellers try to push the contract, buyers resist the downward trend. When once again the bottom of the pattern isn’t broken, the sellers begin to back off, leading the buyers to dominate and send the trend upward. Since it is a bearish reversal pattern, a diamond top can indicate that a stready uptrend is about to reverse and one could short the market. Since it is a bullish reversal pattern, a diamond bottom can indicate that a stready downtrend is about to reverse and one could long the market.

Support And Resistance

The first example shows a shallow cup and handle pattern developing over the course of approximately two to three months. The cup features a gentle pullback after a strong bullish movement and the right side of the cup reaches the same price level as the left side of the cup. The false breakout in the handle on August 13 occurs on low trading volume, demonstrating the importance of using trading volume as a method of confirming the breakout.

cup and handle reversal

Akamai Technologies, Inc. consolidated below $62 after pulling back to major support at the 200-day exponential moving average . It returned to resistance in early February of 2015 and dropped into a small rectangle pattern with support near $60.50. This rectangular handle held well above the 38.6% retracement level, keeping bulls in charge, ahead of a breakout that exceeded the measured move target and printed a 14-year high.

Tips From The Trading Desk

At this point, an investor may purchase the stock, anticipating that it will bounce back to previous levels. The stock then rebounds, testing the previous high resistance levels, after which it falls into a sideways trend. In the final leg of the pattern, the stock exceeds these resistance levels, soaring 50% above the previous high. James Chen, CMT is an expert trader, investment adviser, and global market strategist.

How reliable is a head and shoulders pattern?

The head and shoulders patterns are statistically the most accurate of the price action patterns, reaching their projected target almost 85% of the time. … The inverted head and shoulders pattern has two swing lows with a lower low between them.

The subsequent decline ended within two points of the initial public offering price, far exceeding O’Neil’s requirement for a shallow cup high in the prior trend. The subsequent recovery wave reached the prior high in 2011, nearly four years after the first print. The handle follows the classic pullback expectation, finding support at the 50% retracement in a rounded shape, and returns to the high for a second time 14 months later. The stock broke out in October 2013 and added 90 points in the following five months.

Thanks to 17th century Japanese rice trader Homma, our charts use candlesticks to gauge traders emotions. In fact, patterns have become such an important part of trading. Finally, you can use a buy-stop trade to take advantage of a bullish trend.

In the diagram below, you can see that the price pattern consists of a larger accumulation base , before forming a smaller accumulation base , before finally leading to a breakout. The cup and handle is an accumulation buying pattern, which is found during long periods of consolidation, and can lead to powerful explosive moves foreign exchange market once the pattern is fully completed. Commodity and historical index data provided by Pinnacle Data Corporation. Unless otherwise indicated, all data is delayed by 15 minutes. The information provided by StockCharts.com, Inc. is not investment advice. A dull market consists of low trading volumes and tight daily trading ranges.

This will only lead to a search for a needle in a haystack, which is a waste of time. Any who, as the price approaches the creek or top of resistance, the stock will have a minor pullback, thus creating the handle. Once this pullback or handle is complete, we are off to the races. Rather than trying to define what a cup and handle pattern is in words, it’s best to use a picture to illustrate the pattern. Join thousands of traders who make more informed decisions with our premium features. Real-time quotes, advanced visualizations, backtesting, and much more.

Cup And Handle

I’ve just come across your work – since last week’s online trading summit – and it’s outstanding. If you’re entering on the 5-minute timeframe, then a factor of 6 would be, 5 multiply by 6, which gives you the 30-minute timeframe. If you’re short, you want to exit your trades before swing low or Support. Also, give your stop loss some buffer below the swing low as you don’t want the price to breach the lows, and only to reverse higher. With this in mind, you can trail your stop loss on the previous swing low because if the market wants to continue higher, the previous swing low shouldn’t be “broken”. If it doesn’t, then chances are it’s in a range or about to reverse lower.

The Cup and Handle is a chart pattern, which has a bullish potential. The confirmation of the pattern comes in at the green circle at the moment when the price action moves above the handle. You would typically look to buy the AUD/USD Forex pair when the candle closes above the handle.

cup and handle reversal

The cup and handle pattern is a trading pattern that can be analysed in all financial markets. The cup and handle formation is created when the price of an asset falls but then makes its way back up to the point where the fall started. Cup and handle patterns are found on all timeframes, from intraday charts up to weekly and monthly charts. A chart pattern – or price pattern – is an identifiable movement in the price on a chart that uses a series of curves or trendlines.

Author: Coryanne Hicks

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