Continuation chart patterns usually occur during price consolidation periods and offer great opportunities for traders to open positions in the direction of the dominant trend. The most common continuation chart patterns include directional wedges, flags and pennants. These patterns build up in a retracement manner and a breakout in the direction of the main trend confirms that the temporary pullback is now over. The time period of cup and handle patterns can vary, but is one of the most critical factors both in determining whether a cup and handle is developing and in finding entry and exit points.
Trade forex, CFDs and commodities with a Valutrades ECN Account. All services and products accessible through the site /markets are provided by FXCM Markets Limited with registered address Clarendon House, 2 Church Street, Hamilton, HM 11, Bermuda. Trade your opinion of the world’s largest markets with low spreads and enhanced execution.
The Markets Smoothly Draws The Pattern
The pattern on the right is more traditional, with a clear cup shape, followed by a handle breakout to the upside. The rounded part is the Cup and the small bearish channel is the handle. The confirmation of the formation is illustrated with the small green circle when the price action breaks the handle downwards.
- As the cup is completed, price trades sideways, and a trading range is established on the right-hand side and the handle is formed.
- Call me crazy, but actually using the technicals right in front of my face makes far more sense than applying some universal profit target system.
- The green box represents the profit target 22.7%, which is about 3.5x the amount risked.
As with most chart patterns, it is more important to capture the essence of the pattern than the particulars. The cup is a bowl-shaped consolidation and the handle is a short pullback followed by a breakout with expanding volume. A cup retracement of 62% may not fit the pattern requirements, but a particular stock’s pattern may still capture the essence of the Cup with Handle. A Cup and Handle pattern is a bullish continuation pattern that resembles a teacup on a candle chart. The handle part is when the price pullback slightly before roars higher and continues the previous trend.
The smaller down waves heading into the cup and handle provide evidence that selling is tapering off, which improves the odds of an upside move if the price breaks above the handle. If the trend is up, and the cup and handle forms in the middle of that trend, the buy signal has the added benefit of the overall trend. In this case, look for a strong trend heading into the cup and handle. 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.
We then trade a breakout of the consolidation with a stop loss below the consolidation low . For the purposes of this article, I want to introduce you to the idea of buying the cup and handle breakout when the candlestick closes above the Ichimoku cloud. For those unfamiliar with the indicator, if the stock is able to close above the cloud convincingly, this is additional confirmation of the strength of the trend. If the stock is unable to close above the cloud, then the bears are in control and longs should step aside.
How Much Does Trading Cost?
The next logical thing we need to establish for the Cup and Handle trading strategy is where to take profits. Second buy entry on the breakout of the initial peak from where we started drawing the cup. Next, we need to figure out an entry technique, which brings us to the next step of the Cup and Handle trading strategy. Now we move to the second component of the Cup and Handle pattern and the second step of the Cup and Handle trading strategy. Now that we know what is Cup and Handle, let’s walk through the trading rules of the Cup and Handle trading strategy that can set you apart from the rest of the crowd.
Here the price will oscillate between the upper and lower trendline that forms the handle. Enter a pending buy order to activate at a price just above the main resistance line. Set the order to expire cup and handle chart pattern if the price does not reach the entry level within a time limit. The time limit will depend on the chart’s period, but it should be no longer than about half the time taken to form the handle.
The Traits To Look For To Find High Quality Stock Trades
It creates a U-shape, or the “cup” in our “cup and handle.” The price then moves sideways or drifts downward within a channel—that forms the handle. A cup and handle is a technical indicator where the price movement of a security resembles a “cup” followed by a downward trending price pattern. This drop, or “handle” is meant to signal a buying opportunity to go long on a security.
The target can be estimated using the technique of measuring the distance from the right peak of the cup to the bottom of the cup and extending it in the direction of the breakout. A common stop level is just outside the handle on the opposite side of the breakout. The Inverted Cup and Handle is the bearish version that can form after a downtrend. TradingView has a smart drawing tool that allows users to visually identify this pattern on a chart. The theory behind the cup and handle pattern is that if the price tried to drop but then rebounded, there must be strong buying momentum behind the asset to continue moving higher.
Precious Metal Charts
It is also prudent to combine chart patterns with other analysis techniques, such as technical indicators and candlestick patterns, to qualify the generated trading signals. This will help alleviate the disadvantages of chart patterns, such as false signals and subjectivity bias. Timing is an important aspect when it comes to trading chart patterns. This is why conditional orders, such as stop orders and limit orders, provide the best way to take advantage of trading opportunities created by chart patterns.
Trading The Cup And Handle Chart Pattern
It will be a signal that bulls are charged up for another strong push higher. The handle on inverted cup and handle patterns form on the right side just like it’s counterpart pattern the cup and handle. The handle could also be forming secondary patterns such as a flag or wedge . The cup and handle pattern occurs in both small time frames, like the one-minute chart, and in large time frames, like daily, weekly, and monthly charts.
If you want to day trade you’ll choose a shorter time frame, perhaps one hour or less, but for momentum trades a longer time frame such as daily works best. You can also analyze the weekly chart to get a long-term picture of the market. Once you have the proper time frame your analysis is a matter of looking for emerging trends and technical patterns, as well as support and resistance levels. Overall, the advantages of chart patterns far outweigh their disadvantages.
Triangle Patterns Continuation
Conditional orders have defined price targets and they help traders manage risks, open positions, as well as secure profits. As mentioned above, chart patterns are usually rule-based and have specific price targets when they form. This makes chart patterns the ideal Forex platform analysis type for trading conditional orders, where specific price levels are targeted. Rims – ideally relationship 1st – 2nd support efforts will offer the trader an advantage before the break. Solid double bottom price effort is a close 2nd choice set up.
However, some traders make the mistake of assuming that once a U-shape forms, the price will drop to form a handle. It may not, so you should ideally avoid trading the pattern until it has fully formed, in order to confirm Exchange rate the trend. You could wait for the price to break above the handle to signal that the uptrend is continuing. A cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities.
Author: Katie Conner