The cup and handle chart pattern is by far one of the most reliable chart patterns there is. It can be used for swing trades and for longer term holds depending on the time frame we are looking at.
The nice thing about the cup and handle pattern is that it can be used on anything that can be traded, whether it be stock indexes, individual stocks, forex and futures.
And its not just that it can be used on anything tradeable, the cup and handle chart pattern is just as effective on intraday charts, whether it be an hourly or 15 minute chart. Anything shorter of a time frame, it starts to lose its predictive power.
Overview Of The Cup And Handle Pattern
The cup and handle pattern is mostly used as a bullish continuation pattern, meaning its just a “holding pattern” or consolidation before the stock continues higher. It was first described by William O’Neil in his book “How to Make Money in Stocks”. As you may have guessed it consists of two parts. The “cup” and looks like a bowl.
After the cup forms then the “handle” develops and it is normally a relatively tight trading range. Once the stock breaks above the handle the formation is complete and the stock is now back in rally mode.
Cup and Handle Chart Pattern Examples
In this example which is a pretty typical cup and handle, AMD corrected in price and formed a rounded cup, then formed the handle in a period of just over a week. This example would be perfect for swing trading as here it formed over a period of about a month.
Depending on how volatile the stock is will determine how deep the cup is. In this example its pretty shallow. You really don’t want to see it too deep as it will expend all its energy just trying to get out of the correction.
With the MELI cup and handle formation it took longer, in this case about two months and was a “deeper” cup. However the handle is textbook, forming over the course of two weeks. In my opinion and most other successful traders, the handle is more important.
You want to see it fairly flat and narrow. They flatter and narrower the better. If should break out of the handle in two weeks or less. Any longer and I wouldn’t take the signal anymore because it means the stock is losing momentum.
I have found the best cups form over the period of about a month but no more than two. The handle should be about one to two weeks. If your going to use it for swing trading, you need to know what your target is so you can get out for maximum profits.
Taking the above example, I’ll show you how to calculate your profit target:
Here the cup is from about $45 to $35 so a range of $10. So we add $10 to the handle and we get a profit target of $55.
What To Remember
You want to buy the stocks once it breaks above the handle. Once you are in the trade place your stop loss just below the handle. If the stock trades below it, that negates the trade and its time to get out. Once you are in the trade, assuming it hits your profit target, take your profits and move on to the next trade.
The cup and handle pattern works with just about and financial, be it currencies, commodities or indexs and almost any time frame. The cup should form over a period of one to two months and the handle should for over a period of own to two weeks.
The flatter the handle is the better. When the stock breaks out of the handle you want to see a pick up in volume to confirm the move.
If it doesn’t, the stock may not have enough momentum to make a good trade.
This is one of the strategies that all successful stock picking services use like Jason Bond and Microcap Millionaires. I would recommend using a swing trading service at least until you can pick stocks reliably on your own.
Here are the two stock picking services I use for almost all of my trades: Microcap Millionaires and Jason Bond Picks
If Penny Stocks are your thing, then you should definitely check out Microcap Millionaires.
You can read all my reviews on stock picking services here:
If you are looking to open a brokerage account or looking for a better one, I wrote some reviews of brokers I have used and currently using.
OptionsHouse Review (Currently Using)
– Robert Walsh