A saucer, also called “rounding bottom”, refers to a technical charting pattern that signals a potential reversal in a security’s price. Consider a scenario where a stock has recently reached a high after significant momentum, but has since corrected, falling almost 50%. At this point, an investor may purchase the stock, anticipating that it will bounce back to previous levels. The stock then rebounds, testing the previous high resistance levels, after which it falls into a sideways trend.
During the consolidation phase, the trend appears to change; however, the continuation of the preceding trend is more probable. The pattern is completed when the price action breaks the resistance level formed by the peaks that form the rim of the Cup. The price drifts sideways or moves downward within a channel that forms the handle.
There are situations when the reliability of the cup and handle pattern is diminished. Measure the distance from the cup high to the cup low and project that same distance beginning at the handle’s low point. So long as the handle remains in the upper half of the cup, this level of price projection leads to an attractive risk-to-reward ratio on the trade. The cup and handle pattern starts with an uptrend, followed by a 30–50% correction.
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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. After the Cup is formed, the market has shown signs of bottoming as it makes higher lows towards Resistance. Day trading is subject to significant risks and is not suitable for all investors. Any active trading strategy will result in higher trading costs than a strategy that involves fewer transactions.
Anyway, the Handle isn’t supposed to last for too long – not longer than the Cup’s own length, at least. It usually ends in the same place it started – at the top of the Cup, more or less. After this point, the trend is supposed to rise for some time. Once this price rise reaches more or less the place where the initial drop started, the growth ends and gets replaced by a timid bearish shift – the Handle part.
- A stop-loss can be placed below the low price point in the handle.
- At the base of the u formation, a new rising wedge or rising channel forms, thus creating the handle formation.
- And when the trading setup is “destroyed”, the reason to stay in the trade is no more.
- Now that we have covered a short introduction to the cup and handle pattern, let’s walk through a few day trading strategies that can separate you from the crowd.
- The inverted cup and handle pattern forms an upside down cup and handle.
In the final leg of the pattern, the stock exceeds these resistance levels, soaring 50% above the previous high. A cup and handle is considered a bullish signal extending an uptrend, and is used to spot opportunities to go long. The volumepattern should resemble that of a Round Top / Bottom for both the cup and the handle formations.
Cup & Handle
An easy way to figure this out is to place a 50-period moving average on top of the volume. Aside from having a clearly defined pattern with specific entry and exit parameters, this chart pattern is a favorite among cup and handle chart pattern traders because it is simple to identify. There aren’t a lot of fancy indicators or technical tools needed to spot the pattern. At that point, the cup of the pattern was completed and the handle was about to begin.
The highest volume bar on the chart appears on June 5 , the day after the price closed above the high set on January 18. On this day, 345,500 shares of Winnebago were traded—almost 475% above the 50-day average trading volume of 60,100 shares. This provides an indication that the upward price trend could continue—which in fact it does.
The full pattern is complete when price breaks out of this consolidation in the direction of the cups advance. As a general rule, cup and handle patterns are bullish price formations. Founder of the term, William O’Neil identified four primary stages of this technical trading pattern. First, approximately one to three months before the “cup” pattern begins, a security will reach a new high in an uptrend. Second, the security will retrace, dropping no more than 50% of the previous high creating a rounding bottom.
Cup And Handle
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With this chart pattern, the handle has to be smaller than the cup. It should not drop into the lower half of the cup; it should stay in the upper third. The profitable Cup and Handle trading strategy might be a humorous name.
When the second swing low fails to push below it, it is a warning that a reversal might occur. Once the market breaks above the resistance level, it confirms the bullish reversal. Following those footprints can lead you to riches or disaster, depending on your experience tracking their signals. The following links, Forex Club arranged alphabetically, provide free information describing the shape of those footprints, what to look for, and how to trade their signals. A standard cup and handle structure should develop in a rising market. The equivalent bearish pattern is an inverted cup and handle that appears in a falling trend.
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Stop loss orders may be placed either below the handle or below the cup depending on the trader’s risk tolerance and market volatility. Instead, include volume, short-term price patterns, and other support/resistance tools to pinpoint trading opportunities. While the target projection of chart patterns is a valuable tool for target setting, combine the projected target with other support/resistance levels for better results.
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This way, if the breakout fails and falls back below the handle’s low, then you can close out the trade at a small loss and move on to the next opportunity. As prices approach the old high, a failed breakout traps both recent buyers and buyers at the bottom of the base. Recent buyers see their small floating gain evaporate, and buyers at the bottom of the base fear a double top reversal.
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Past performance is not necessarily indicative of future results. This is not a problem because trading chart patterns is, in any case, beyond simple pattern recognition. The conservative entry for the Cup & Handle chart pattern is to buy on break-out of the high of the cup.
Nevertheless, notice how once the handle completed and the stock sky rocketed off, the area around the cloud acted as support prior to the move up. It can indicate that a downtrend in a upward moving market is about to end. Watch volume in this scenario, as it is likely to increase once the contract is below Credit default swap support. This support level may now become a new resistance level in the new trend. A Double Bottom is a reversal pattern that occurs at the peak of a downward trend and can mark the beginning of an upward trend. A diamond bottom is a bullish reversal pattern that can mark the beginning of an upward trend.
Author: Lorie Konish