cup and handle reversal

The bears have the upper hand here, and as they sell, prices will fall. The Cup and Handle pattern is often considered a bullish signal. However, there is also the reverse cup and handle, which represents a bearish trade. If you’re not ready to take on the live markets, you can open a risk-free demo account to identify the cup and handle pattern and practice your trades. The entry point for a cup and handle pattern is to buy when the price moves above the handle formation. This is made simpler by using a drawing tool and waiting for the price to move up and out of the drawn handle pattern.

We have been producing top-notch, comprehensive, and affordable courses on financial trading and value investing for 250,000+ students all over the world since 2014. Similar to the Relative Strength Index , the stochastic also indicates overbought and oversold conditions of the market. But you have to make sure that you’ll always place a stop-loss to reduce risks and protect your account. It’s important to note that the size of the pattern really matters. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.

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As an award-winning futures broker, NinjaTrader provides deep discount commissions and unmatched support. Download NinjaTrader free today to start analyzing inverted cup and handle patterns and building your trading strategy. Let me remind you that the inverted cup and handle breakout is only confirmed when the price action closes below the support line. The best strategy is to use this indicator as a way to identify potential reversal signals. This will help you confirm a downward breakout on the inverted cup handle pattern.

Can a cup and handle be a reversal?

Cup and Handle patterns can be seen both as bullish continuation or reversal patterns. A continuation pattern is formed when there is a prior uptrend, followed by a consolidation in the form of Cup and Handle pattern and then the uptrend continues post-breakout.

The subsequent recovery wave reached the prior high in 2011, nearly 10 years after the first print. A trailing stop-lossmay also be used to get out of a position that moves close to the target but then starts to drop again. The Cup with Handle confirmation comes when the price breaks out cup and handle reversal of 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.

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A rounding bottom is a chart pattern used in technical analysis that is identified by a series of price movements that graphically form the shape of a “U.” Another issue has to do with the depth of the cup part of the formation.

  • The cup and handle pattern is a bullish continuation pattern that consists of two parts, the cup and the handle.
  • The idea behind the Cup and Handle pattern is to trade the breakout when the price breaks above the “handle”.
  • The stop-loss controls risk on the trade by selling the position if the price declines enough to invalidate the pattern.
  • Ideally, the price should stay within the top 1/3rd of the height of the cup.
  • A cup with handle pattern is a continuation pattern that gets its name from the visual pattern it makes on the chart.

And usually, you exit your trades just before the opposing pressure steps in. With this in mind, you can trail your stop loss on the previous swing low because if the market wants to continue higher, the previous swing low shouldn’t be “broken”. For a trend to continue higher, it MUST make higher highs and lows. However, the market could do a False Breakout and you are long the highs. Because this is a sign of strength telling you there are buyers willing to buy at these higher prices. But, if you noticed that the price is holding up nicely at Resistance, then it’s a sign of strength as it tells you buyers are willing to buy at these higher prices.

Questions about Cup and Handle pattern

In addition, a shorter and less severe downtrend during the handle is a good indicator that the breakout will be extremely bullish. A cup and handle pattern occurs when the underlying asset forms a chart that resembles a cup in the shape of a U, and a handle represented by a slight downward trend after the cup.

  • The handle can develop over one week to several months on a daily chart, although ideally completes in less than one month.
  • 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.
  • This is a situation where you place a buy-stop order above the resistance.
  • You could also use the larger height for an aggressive target.
  • A doji is a trading session where a security’s open and close prices are virtually equal.

To protect against losses, many investors set a stop-loss order at a level below the cup and handle pattern. Cup and handle patterns form as the result of consolidation after an uptrending stock tests its previous highs.