How to Trade the Cup and Handle Pattern
The image above displays the standard cup and handle pattern. To trade this formation correctly, a trader should place a stop by order slightly above the upper trendline that makes up the handle. This way, the buy order will only execute if the price breaks above the upper resistance level. This will avoid jumping into a cup and handle pattern too early by entering a false breakout. For traders who want to add a little more certainty to their trade, they should wait for the price to close above the upper trendline of the handle.
Often traders try to buy the stock at a lower price once it breaks the upper trendline, hoping for the price to move back down temporarily, but here they run the risk of the price continuing to advance upward, missing the trade altogether.
Considerations
The cup and handle pattern as a lower failure rate when compared to other chart patterns, meaning it is a good indication of what’s to come. Patterns were shorter handles have a higher success rate than patterns with longer handles. Patterns with a more bottomless cup accompanied by a slightly more upper left lip versus right lip also have a higher success rate.
Attributes
- Pattern type: Continuation
- Indication: Bullish
- Breakout confirmation: When there is above-average volume, and the stock closes above the upper trendline drawn from the top of the handle.
- Measuring: The price target is obtained by measuring the distance from right lip to the bottom of the cup and then adding that to the price level of the right lip.
- Volume: Increased volume is typical following the shape of the cup, with higher volume as the left lip forms, decreasing volume as the bottom of the cup forms, and raising volume towards the right lip which continues on to the breakout.
Conclusion
The cup and handle pattern was made popular by William O’Neil, which now has expanded into all sorts of trading scenarios. Traders have come to know the cup and handle as a bullish continuation pattern that is a highly accurate predictor of sizable breakouts. To learn more about stock chart patterns and how to take advantage of technical analysis to the fullest, be sure to check out our entire library of predictable chart patterns. These include comprehensive descriptions and images so that you can recognize important chart patterns scenarios and become a better trader.
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