Cup and handle chart pattern How to trade the cup and handle IG International

The confirmation of the pattern comes when the price action breaks the channel of the handle in the bearish direction. The first target of the pattern equals to the size of the bearish channel around the handle, applied downwards starting from the moment of the breakout. The second target equals to the size of the cup, applied downwards starting from the moment of the breakout. 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. Unlike other chart patterns, the cup and handle pattern does not work equally for both the bullish and bearish scenario, as it is almost exclusively found in the bullish scenario only.

As they build up their positions, we start to see a wide U-shape bottom , where bulls and bears are almost balanced. This suggests that the bears are no longer in control, and the downtrend has been neutralized. And you still have to be vigilant and watch for contrarian signals to stay safe. As you can see on the chart, stochastic divergence occurs when the price rebounds and reaches the high of the handle. The EMA 20 line acts as a dynamic resistance that prevents the price to go up.

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Finally, the security breaks out again, surpassing its highs that are equal to the depth of the cup’s low point. 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.

With the best trading courses, expert instructors, and a modern E-learning platform, we’re here to help you achieve your financial goals and make your dreams a reality. And the thing is that breakouts usually happen on high volumes. That’s to say, you can use volume as a way to confirm a breakout.

Cup and Handle Pattern

A trader has to follow how it plays out by letting winning trades run but cutting losing trades short. This information has been prepared by IG, a trading name of IG Markets Limited. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information.

• 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.
• Volume that dries up at the top suggests funds lost interest in buying.
• It shows the price found a support level and couldn’t drop below it.
• Prior to the decline that started the cup and handle pattern, the price had advanced about 30% over several months.
• Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

Below are visual examples of failed cup and handle chart patterns on the price charts of various markets. 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. This article will explore how to identify and trade the cup and handle pattern in various financial markets. As you see, the price reached the first target of the pattern prior to the entry, had you waited for the candle close to enter.

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The pattern on the left is more complex as the cup pattern is wavy and harder to identify. The pattern on the right is more traditional, with a clear cup shape, followed by a handle breakout to the upside. Now I show you an example where the price breaks above the handle resistance and goes up strongly. This is something that is more expected when a cup and handle forms on the chart. In most cases bulls will take the control after the formation of the handle and the price will go up after the handle resistance breakout. See the second big bearish candle, which reaches the second target. The high and the low of this candle could be used to draw a horizontal support / resistance zone on the chart.

These movements form a ‘u’ shape on the chart – this is known as the cup. The cup and handle pattern occurs in cup and handle reversal small time frames, like a one-minute chart, and in large time frames, like daily, weekly, and monthly charts.

How to Trade the Cup and Handle Chart Pattern

Target 2 – equals the vertical size of the cup applied at the moment of the breakout through the handle. The Cup with Handle pattern has its bearish equivalent, and is referred to as an Inverted Cup and Handle formation. This is the hourly chart of the USD/CAD Forex pair for March 25-30, 2016. The image illustrates the way a bearish Cup and Handle pattern could be traded. The stop loss order of this trade needs to be placed below the lowest point of the handle.