Trading Strategies for the Cup and Handle Chart Pattern

Trading Strategies for the Cup and Handle Chart Pattern

Discovered and explained back in 1988 by William J. O’Neil in his “How to Make Money in Stocks” publication, it is one of the most popular trading patterns. It will assist in understanding the current market’s trend better and make corresponding buy-and-sell decisions. In this guide, let’s take a deeper insight into the nature and efficiency of handle and cup patterns. It is definitely worth your time and attention.

Introduction to Cup and Handle Patterns

What is cup and handle in trading? Here are a few basic aspects to know and get acquainted with the cup handle pattern:

  • Thanks to the sequence of price rises and falls, the chart reminds traders of a U-shaped silhouette depicting a downward trend in the form of a horizontal line on the graph, hence the name.
  • With stop-loss orders as a risk mitigation strategy, enthusiasts can use this pattern to define the best moment to buy stocks before their prices rise.

Overall, it is a typical example of bullish signals in the market that predict the upcoming upward trend. It will come in handy for locating the stocks to buy at a lower price and go long with them. Its success rate is around 95%.

How to Interpret Cup with Handle Chart Pattern

Given its complex silhouette, the stock cup with handle takes time and skill to define accurately. However, once you know its key components, it works as a reliable indicator for multiple trading decisions.

Exploring the Characteristics and Meaning of Cup and Handle Charts

Check the stock’s price first and denote whether its uptrend takes place before the base is formed. Compared to the last breakout, it should rise by 20% at least or demonstrate a 30% increase from any prior price point. It will define the cup’s depth. The fall of the stock by 40% to 50% may also take place, but they should be considered when a bear market is established.

Typically, the range from 8% to 13% is a good decline for the cup handle chart’s high to low. chart cup and handle. To calculate the actual base’s midpoint, take its high and low and divide its sum by two:

  • The low and high of the cup are 93 and 136, correspondingly.
  • With its sum of 229, its middle point will be at the rate of 114.5.
  • The handle’s formation has to possess some price lows and a descending slope. If it has the low and high of 122 and 133, respectfully, its midpoint will be 127.5, which is ahead of the analogous parameter of the cup.

In chart cup and handle formations, the latter is even more crucial. If it isn’t high enough, it may be a misleading signal. It has to showcase a new wave of traders at a pretty drastic pace rather than a slopping movement of the handle, depicting a low demand for the asset. Focus on those with a descending rather than ascending slope.

Market Behavior and Psychological Aspects in Handle and Cup Analysis

It is easy to explain the buy-and-sell tendencies for the cup with handle stocks:

  • The descending slope of the asset’s price depicts a smaller demand for new purchases made. That’s when a lot of investors tend to get rid of the stock before the price drops even more — it is commonly known as the herd mentality of traders. In practice, it causes the opposite effect.
  • This formation is a good buying opportunity, with the handle depicting the moment when traders sell their shares and boost their profits. It established a consolidation period before the next breakout in the asset’s price chart.

Take into account the pattern’s resistance and support levels and analyze other criteria for the right investment choice:

  • The asset’s price consolidates near a resistance line, resulting in a limited selling opportunity before it drops again. That’s when the handle shape is established.
  • The cup formation is connected with a support line and its further bouncing back to a resistance line.

Variations of Cup and Handle Patterns

Classic versions of cup and handle charts are widespread, but trading isn’t always as predictable as the book suggests. Keep on reading this guide to see a few more alternatives to the cup and handle formation.

What You Should Know About Cup and Odd Handle

This version of the cup with a handle chart pattern doesn’t have a traditional design and can have an extended handle. While it is commonly equivalent to the one-quarter length of the cup, it may reappear after a short-term breakout instead of a lasting one. Aside from its non-linear handle, the chart’s cup shape is also less rounded.

Exploring Intraday and Multi-Year Cup and Handle Formations

As the term implies, the multi-year type of the pattern develops over several years. Its shape will be closer to the letter V than U. It starts with the initial sharp decline in the asset’s price and comes with the following steady decrease in its rate that defines the handle.

Another format of the pattern that depends on the timeframe is known as the intraday version. This accelerated phenomenon has all the same features as the classic kind but forms within a day or less:

  • The cup consists of the price pulling back (represented by a candlestick rounded bottom) and a subsequent rise.
  • The handle is downward-slopping and breaks out to continue the current market’s trend, namely, the bullish one.

The Benefits and Drawbacks of Cup and Handle Charts in Trading

Despite its potentially long-term formation, this pattern is highly appreciated for its visual clarity. Not only does it let interested parties identify the trend reversal, but it also shows clear entry and exit points for buy-and-sell orders. When confirmed by the volume and other technical analysis tools, it is profitable to start trading cup and handle patterns.

On the other hand, the cup and handle stock pattern can’t be the only indicator for your trading decision:

  • It is a pretty long-term chart because of its formation principle.
  • It is essential to measure the cup’s head and avoid signals below 33% — they might indicate other patterns, especially in the bull market.
  • Don’t forget to measure a profit target. It will be the same number of points above the handle to match the distance between the breakout level and the cup’s base.
  • The formation of the cup is more frequent than the handle itself.
  • Although a retest of the past resistance level doesn’t have to be similar, the more distance the handle’s top will be from its highs, the greater the breakout moment will need to be.

Utilizing Cup with Handle Patterns for Different Trading Scenarios

The cup pattern trading methodology will be incomplete without the following:

  • Take into account the asset’s volume. In the classic graph, it drops down as the price falls and stays below the base’s average volume rate.
  • Handles are most likely to occur in the cup’s top half.
  • It is better to stay far from V-silhouetted cups and those overly deep ones.

To stay on the safe side, it is a must to place stop orders. Although a lot depends on the market’s volatility and the target investor’s risk mitigation tactic, there are two more classic placements — below the cup or the handle to buy and sell the stock. If the price doesn’t break the resistance level, it may indicate a steady continuation of the bullish moment without a pullback.

Look for cup pattern stocks after recent highs that are followed by a steady and significant price correction. Based on the psychological aspects of investors, that’s when several engaged members tend to panic and get rid of their assets to save their funds. Instead, the stock can easily rebound itself — please don’t forget to consider its highs and lows to prove the formation.

A short- or medium-term boost in the stock’s price characterizes the post-handle period. If the indicators are misleading, the bullish moment doesn’t necessarily occur.

Stocks Cup and Handle Chart Pattern Trading Strategies

Here are a few cup and handle examples in trading to be aware of for prominent deals:

  • Trade the supply line — try to rely on trendlines instead of the cup’s depth. The stock may be almost hitting the target but drop down a bit. Your task here is to decide whether you make a sale now or wait until the target is hit. Instead of one-to-one profit targets, if the result isn’t achieved because of a small fall or rise in the price, selling the upper resistance line and supply can be an effective decision.
  • Consider the strong handle — this chart showcases noticeable strength in speed, volume, and price action. A great illustration will be a pattern with four candlesticks that don’t break the 38% retracement. You can spot such run-ups if they include the range of four to nine candlesticks in a relatively small time frame. In this case, the most common scenario is when the breakout candle is maximally close to the chart’s resistance line but leads to a consideration price expansion.
  • On the cross of the cloud — cup and handle trading patterns allow the Ichimoku Cloud trading tactic to complement your portfolio of tools. To put it briefly, it lets you define the trend in the market — downward for prices falling below the red cloud and upward for deals above the green cloud. It will also help indicate the degree of volatility based on the cloud’s thickness. This strategy requires an in-depth understanding of all its crucial elements, the Tenkan- and Kijun-sen, Senkou Span A and B, Chikou Span, and the cloud itself.

Final Thoughts

With stop orders and other risk management tactics, traders can benefit from using the signals of cup and handle patterns from both short- and long-term perspectives. It will help enthusiasts get a better understanding of how the market works and how standard psychological profiles of investors have a similar impact on the asset’s rise and fall.