Cup and Handle DefinitionA cup and handle price pattern on a security's price chart is a technical indicator that resembles a cup with a handle, where the cup is in the shape of a "u" and the handle has a slight downward drift. The cup and handle is considered a bullish signal, with the right-hand side of the pattern typically experiencing lower trading volume. The pattern's formation may be as short as seven weeks or as long as 65 weeks.A cup and handle is a technical chart pattern that resembles a cup and handle where the cup is in the shape of a "u" and the handle has a slight downward drift.A cup and handle is considered a bullish signal extending an uptrend, and is used to spot opportunities to go long.Technical traders using this indicator should place a stop buy order slightly above the upper trendline of the handle part of the pattern.
What Does A Cup And Handle Tell You?
American technician William J. O'Neil defined the cup and handle (C&H) pattern in his 1988 classic, "How to Make Money in Stocks," adding technical requirements through a series of articles published in Investor’s Business Daily, which he founded in 1984.1 2 O'Neil included time frame measurements for each component, as well as a detailed description of the rounded lows that give the pattern its unique tea cup appearance.As a stock forming this pattern tests old highs, it is likely to incur selling pressure from investors who previously bought at those levels; selling pressure is likely to make price consolidate with a tendency toward a downtrend trend for a period of four days to four weeks, before advancing higher. A cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities.
It is worth considering the following when detecting cup and handle patterns:
Length: Generally, cups with longer and more "U" shaped bottoms provide a stronger signal. Avoid cups with a sharp "V" bottoms.Depth: Ideally, the cup should not be overly deep. Avoid handles that are overly deep also, as handles should form in the top half of the cup pattern.Volume: Volume should decrease as prices decline and remain lower than average in the base of the bowl; it should then increase when the stock begins to make its move higher, back up to test the previous high.A retest of previous resistance is not required to touch or come within several ticks of the old high; however, the further the top of the handle is away from the highs, the more significant the breakout needs to be.
Example Of How To Use The Cup And Handle
The image below depicts a classic cup and handle formation. Place a stop buy order slightly above the upper trend line of the handle. Order execution should only occur if the price breaks the pattern’s resistance. Traders may experience excess slippage and enter a false breakout using an aggressive entry. Alternatively, wait for the price to close above the upper trend line of the handle, subsequently place a limit order slightly below the pattern’s breakout level, attempting to get an execution if the price retraces. There is a risk of missing the trade if the price continues to advance and does not pull back.
What Does A Cup And Handle Tell You?
American technician William J. O'Neil defined the cup and handle (C&H) pattern in his 1988 classic, "How to Make Money in Stocks," adding technical requirements through a series of articles published in Investor’s Business Daily, which he founded in 1984.1 2 O'Neil included time frame measurements for each component, as well as a detailed description of the rounded lows that give the pattern its unique tea cup appearance.As a stock forming this pattern tests old highs, it is likely to incur selling pressure from investors who previously bought at those levels; selling pressure is likely to make price consolidate with a tendency toward a downtrend trend for a period of four days to four weeks, before advancing higher. A cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities.
It is worth considering the following when detecting cup and handle patterns:
Length: Generally, cups with longer and more "U" shaped bottoms provide a stronger signal. Avoid cups with a sharp "V" bottoms.Depth: Ideally, the cup should not be overly deep. Avoid handles that are overly deep also, as handles should form in the top half of the cup pattern.Volume: Volume should decrease as prices decline and remain lower than average in the base of the bowl; it should then increase when the stock begins to make its move higher, back up to test the previous high.A retest of previous resistance is not required to touch or come within several ticks of the old high; however, the further the top of the handle is away from the highs, the more significant the breakout needs to be.
Example Of How To Use The Cup And Handle
The image below depicts a classic cup and handle formation. Place a stop buy order slightly above the upper trend line of the handle. Order execution should only occur if the price breaks the pattern’s resistance. Traders may experience excess slippage and enter a false breakout using an aggressive entry. Alternatively, wait for the price to close above the upper trend line of the handle, subsequently place a limit order slightly below the pattern’s breakout level, attempting to get an execution if the price retraces. There is a risk of missing the trade if the price continues to advance and does not pull back.
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