Cup And Handle Pattern Trading Strategy Backtest And Example

At that level, traders who bought the stock near the previous highs are likely to sell, causing a gentle pullback. This pullback is then met with bullish activity, which causes the rounded bottom and rise of the right side of the cup. As the stock once again tests its highs, another pullback – the handle – is observed, but this time bullish investors are able to push the stock higher as they snap up discounted shares. The pattern forms during as a result of consolidation a bullish movement and indicates a continuation of that bullish trend after its completion. 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. Instead of a ‘u’ shape, it forms an ‘n’ shape, with the handle bending slightly upwards on the chart.

Secondly, practitioners have found issues with the depth of the cup. While a shallower cup can represent a bullish signal, a deeper cup can produce a bearish signal. It can be confusing to pick up a particular cup and invest on its basis cup and handle reversal as this can lead to wrong decisions. Lastly, it has been identified that at times cup and handle patterns can be unreliable in illiquid stocks. Technical indicators work better when used in conjunction with other signals and patterns.

Investment Accounts

In the middle of the image you see a bullish Cup and Handle pattern, which is illustrated with the blue lines on the graph. Sometimes, the beginning of the decrease and the end of the increase could diverge in terms of the level they are supposed to be located at. However, a small discrepancy between the tops of the two trends is admissible. Therefore, we believe that the upward trend will continue as bulls attempt to retest the previous high of $1920. When it does this, we expect that there will be an indecision between the bulls and the bears, which will push the price lower before an eventual rally.

Subsequently, there’s a rally that is almost equal to the previous decline. The cup looks like a “u” or a bowl with a rounded bottom that forms after a price rally, while the handle is a trading range that develops on the right-hand side of the cup. When the price breaks below the handle, it signals traders to exit long positions or enter a short position. A stop-loss order is then placed above the handle and a profit target is calculated by the height of the cup subtracted from the handle breakout point. Alternatively, traders could double the size of the handle and subtract that from the handle breakout point. 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. This could attract traders to open a position at the price rise, or at least avoid opening a short position against it.

How to find a Cup and Handle pattern?

At this point, the cup and handle pattern should be evident. The handle will typically form a descending trendline – aim to enter when the price breaks above this descending trendline. Also watch for sharply increasing trade volume, as that indicates that the stock may be about to break out. Another consideration when evaluating a cup and handle pattern is trading volume.

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 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. When the pattern is complete, a long trade could be taken when the price breaks above the handle. However, some traders make the mistake of assuming that once a U-shape forms, the price will drop to form a handle.

Candlestick Patterns

Some traders like these types of cups, while others avoid them. Those that like them see the V-bottom as a sharp reversal of the downtrend, which shows buyers stepped in aggressively on the right side of the pattern. For example, if a cup forms between $99 and $100, the handle should form between $100 and $99.50, ideally between $100 https://www.bigshotrading.info/ and $99.65. If the handle dives too deep and erases most of the gains of the cup, you should avoid trading the pattern. The cup and handle pattern resembles a U shape with a horizontal line, generally drifting downward, like a teacup. Look for cups with a bottom roughly in line with the price area where the cup began to form.