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Thread: A Cup and Handle: How it works?

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    Default A Cup and Handle: How it works?


    A cup and handle price pattern is a technical signal that looks like a cup with a handle with the cup-shaped like U and the handle slanting downward. The cup and handle pattern is generally bullish, with lesser trading activity on the right side. Pattern creation might take seven weeks or 65 weeks. William O'Neil's Cup with Handle is a breakout pattern. The design includes a cup and a handle to a bowl or a circular bottom. A trading range forms on the right side of the cups, and the handle forms. Following the handles trading range breakthrough, the last advance.

    How it Works
    • The cups should have a bowl-like bottom. There should be equal highs on both sides of the cups in a precise design.
    • A pullback forms the handle after the right cup high occurs. The handle can retrace up to 1/3 of the cups' in advance, but seldom more.
    • 1 to 6 months, sometimes longer. The handle should develop and harden in 1-4 weeks.
    • In this case, the stock breaks out or advances higher through the old barrier (right side of the cups). It will happen with more volume.
    • To estimate the price objective after the breakout, measure the distance from the right top of the cups and add it to the buying point. That is merely a recommendation.

    This chart pattern is a cup and handles with a modest downward drift.
    • Technical traders should set stop buy orders above the handle trend line.
    Cup and Handle Messages

    O'Neil described the rounded lows that give the pattern its teacup shape. Investors who bought at those levels are likely to sell when the stock tries former highs, causing the price to consolidate for four days to four weeks before rising again. This cup and handle pattern detects buying opportunities.

    When recognizing cups and handle patterns, keep in mind:
    • Depth: The cups should not be too deep. Handles should form at the upper half of the cup design to avoid deep handles.
    • When the stock continues to go higher, it should gain volume to retest the prior high.
    • A retest of past resistance need not touch or come close to the former high, but the farther the handle is from the highs, the more meaningful the breakthrough.
    How to Use a Cup and Handle

    As seen in the figure below, a cup and handle Set a stop buy order just above the handles upper trend line. If the price breaks the resistance of the pattern, execute orders. Traders may face excessive slippage and enter a false breakthrough. Alternatively, put a limit order just below the patterns breakout level, hoping to gain an execution if the price retraces.

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    For example, a profit objective is 20 points above the pattern's handle. A trading risk tolerance and market volatility may dictate where stop-loss orders. Consider Wynn Resorts, Limited (WYNN), which went public on the NASDAQ in October 2002 at around $13 and increased to $154 five years later. A two-point drop followed, considerably exceeding O'Neil's shallow high threshold. After a decade of decline, the recovery wave peaked in 2011. A 14 months later, the handle reaches the high, finding rounded support at the 50% retracement. The stock exploded in October 2013 and gained 90 points in five months.

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    Limitations of the Cup and Handle

    Practitioners have discovered issues with the cups and handle. First, it might take time for the pattern. Another difficulty has to do with the depth of the cup component of the formation. Sometimes a shallower cup can signal, while a deep cup might generate misleading signals. Sometimes the cups develop without the typical handle. Finally, one restriction usual across many technical patterns might be unreliable in illiquid equities.

    What is a Cup and Handle?

    The dip or handle is planning to signify a purchasing opportunity to go long on an investment. When this stage of the price development is over, the security may reverse direction and achieve new highs.

    Is a Cup and Handle Pattern Bullish?

    Cup and handle patterns are often bullish price structures. William O'Neil, the terms creator, recognized four main stages. Second, the security will retrace 50% of the previous high, forming a rounding bottom the will rise to their prior high before falling, producing the formation's handle. Finally, the security reaches new heights, equivalent to the depth of the cups.

    Get a Cup and Handle Pattern!

    Consider a stock that just hit a peak but has now corrected, losing nearly half its value. An investor may now buy the stock, expecting a bounce back to former levels. That is followed by a sideways trend, with the stock challenging before high resistance levels. In the last leg of the pattern, the stock soared 50% over the prior high.

    Trading the Cup and Handle Pattern

    William J. O'Neil, the founder of Investor Business Daily, established the cup and handle (C&H) pattern in his 1988 classic, How to Make Money in Stocks." O'Neil described the rounded lows that give the teacup shape.
    • The security achieves a notable high in an uptrend that intensified between one and three months previous.
    • The downturn carves a rounded bottom no intensely than the previous trending 50% retracement. The cup is here.
    • A subsequent pullback occurs around resistance, grinding out a smaller rounded bottom that becomes the handle.
    Numerous cups and handle traders follow O'Neil's construction criteria, but many variants work well. Finding and trading these updated C&H patterns requires an understanding of crowd psychology and a trained eye to see through increased noise levels created by automatic stop running.

    Deconstructing the Cup and Handle

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    A new rally prints a high, and the price rolls over into a correction, converting relative strength oscillators into sell cycles that urge strong-handed longs to abandon holdings. New buyers enter the decline at the 38.6% or 50% retracement level, anticipating the preceding rise to restart. The security rebounds and challenges the high, attracting aggressive short-sellers who predict that a fresh decline would trigger a double top breakdown. First, longs entering deep in the pattern feel anxious since they calculate to fails. At the same time, longs chasing the breakout watch a modest profit disappear and are obliged to protect holdings. Both groups are now targeted for losses or decreased earnings, while short-sellers praise themselves on the back for a job well done.

    Relative strength oscillators now switch into new purchase cycles, encouraging a third group of longs to take a risk. A positive feedback loop comes into motion, with price climbing into resistance, completing the last leg of the pattern, and breaking out in a powerful upswing.

    Multi-Year Cup and Handle

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    Wynn Resorts, Limited (WYNN) went public on the NASDAQ market at around $11.50 in October 2002 and soared to $164.48 five years later. The followed slide stopped within two points of the IPO price, far exceeding O'Neil's shallow cup high criteria. The previous peak was nearly four years ago. The handle returns to the 14 months later, finding support at the 50% retracement in a rounded form. The stock exploded in October 2013 and gained 90 points in five months.

    See also: Wide range of InstaForex technical indicators.

    Odd Handle Cup

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    In 2014, Microsoft produced two non-traditional cups and handling designs. It peaked at $41.66 in April and fell below the 38.6% retracement of the previous trend leg. Towards the end of June, the price recovered to the top of the year. For approximately five weeks (first blue box), it consolidated sideways. O'Neil says the handle should be between a fifth and a quarter of the cup's length. This handle, which holds close to the recent high, shakes off short-sellers and encourages fresh longs to initiate positions. The price structure strengthens resistance near the preceding high a deeper handle retracement reduces the chances of a breakthrough.

    The security ultimately broke out in July 2014, with the upswing perfectly matching the cup length. The rally climax generated a 50% retracement of the recent rally, roughly comparable to the earlier pattern. Pricing remains below the last high, with the cup displaying a V-shaped bottom. It sat sideways for three weeks before bursting out (second blue box). With the four-point depth of the cups added to the resistance line around $46, this rally failed.

    Cup and Handle Trends

    An entry price for larger-scale trends may be found in the 60-minute cup and handle pattern. The pattern's 60-minute cup and handle provide an entrance price for larger-scale trends. Following a test of significant support at the 200-day exponential moving average, Akamai Technologies, Inc. (EMA). In early February 2015, it fell into a little rectangular pattern with support near $60.50. With a breakthrough that surpassed the measured move objective and printed a 14-year high, the rectangle handle kept bulls in control.

    Algorithm for Detecting Cup and Hand

    Last year spent many weeks developing a Cup and Handle pattern scanner with a Princeton buddy.

    Cup and Handle Algorithm

    A Cup and Handle design resembles a teacup on a candle chart. Intuitively, the price swings direction from negative to bullish, giving investors faith in the performance. Price pulls down somewhat before roaring upward and continuing the prior pattern. The Cup and Handle design might take 30 to 50 candles to produce.

    There are two main ways to find chart patterns using algorithms in finance:

    The pattern is by finding the local maximum and minimum in the OHLC data.
    • The fundamental concept is to locate local extremes in pricing data and then construct patterns based on these local extremes.
    • A moving average may be used to identify peaks and troughs.
    Matching Templates

    Template matching is a computer vision technique that finds a tiny that fits a template. To discover a pattern in a chart, we slice the template matrix over time. How to locate the Cup and handle. Return to point A and identify point B where price B is near price A. Let C be the lowest price in range (B, A), and use A, B, and C as milestones in a 5x5 matrix.

    Applying our criteria in a 5x5 matrix follows.

    The chart has no closing price in yellow cells and no high price in orange cells.

    Basic Cup with Handle Features

    Before the base, the stock must gain 30% from any price point or 20% from a prior high. The cup must be seven weeks long. If no handle, the cup must extend for at least six weeks.

    The handle alone takes five days to create, but it may take weeks. Ensure it does not go over the cup part in time or size. A decent cup with a handle should resemble a properly shaped teacup. As a result of the last shakeout of uncommitted holders, the handle always indicates a smaller decrease from high to low. In most circumstances, the drop from high to low should be between 8% and 13%, in cups with handle bases exhibit a substantial double-digit fall during not-good markets. Again, it should not surpass the cup drop. The handle generally starts with a price drop. Be mindful that the handle itself, which must last at least five trading sessions, might become a base. No big deal; it is typically a stock method of indicating a purchase target that is clearer or lower than the large pattern.

    Handle? It Must Be High

    The handle should form in the pattern top section. It is faulty if it is low. Use the easy midway test to see if the handle is correct. Divide the handle highest and lowest prices by 2. That figure should be higher than the base midpoint. Consider the 2007 Baidu (BIDU) cup with a handle. Add the two pricing and divide by 2 to obtain 113.45 as the base midway. The handle midpoint of 126.53 was much above the midway of 132.80.

    Important Points:
    1. Cup
      The Cups are forming like a U with equal highs on both sides. Cup and Handle patterns can also be V-shaped, although the conviction is stronger in U-shaped because of the consolidation at the bottom.
    2. Handle
      The handle is frequently a pullback from the cup's rounded, triangular, or descending channel. The retreat is about 1/3 the amount of the previous surge.
      The smaller the retreat, the strongest the structure and the more likely a breakthrough.
    3. Volume type
      Increased volume should accompany the handle resistance breakout, thereby confirming it. The cups usually form in 1-6 months or longer in weekly and monthly charts. The handle takes 1-4 weeks to develop on the cups.
    Cup and Handle Chart Pattern: Crypto Trading Tips

    The cup and handle indication appears on cryptocurrency price charts. It suggests a prior uptrend pullback and subsequent continuation. It is tough to analyze in crypto markets due to fragmented volume indicators. This trading book teaches the importance of patterns and how to use them to your advantage, go through the indicator's features and limitations.

    Cup and Handle Patterns

    As the price corrects a section of an earlier uptrend, it bounces back toward the prior high, producing the cups. Prices then trade sideways, forming the handle that marks a new high. To make money in stocks, William O'Neil popularized it in 1988. It was 20 years ago that I learned his ways, including the cups and handle. This pattern is usually in the stock market and is shown in the crypto market. The cup and handle pattern may be seen in hourly, weekly, and monthly charts. It is more potent on daily charts. The design comes in several varieties, yet they all appear the same.

    Cup and Handle Pattern Characteristics

    Typically, cup and handle patterns appear after the main gain when the market wants to rest the pattern's five primary components. The pattern's name comes from the first four components, which create a cup with a handle.

    Cup and Handle Pattern for Large Cryptocurrencies

    The cup and handle design are flawed for small-cap coins. Cryptocurrency holders will like the cup-and-handle design buyer and seller interest, the better the indicator.

    The Verdict

    The cup and handle motif has been around for almost 30 years. While the cup and handle pattern has limits, strong crypto trends help make it beneficial in trading crypto markets. William O'Neil's rigorous specifications for the cups and handle pattern more than 20 years ago maybe now stretched into many market circumstances in multiple periods. This big approach allows us to move attention from the classic in conventional description toward a focused focus on crowd psychology that supports its potential to anticipate significant breakouts. You can visit are the top choice in forex trading.
    Last edited by annd143; 03-01-2022 at 08:53 PM.

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