Cup formation – opsiyonlar

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Cup and Handle Chart pattern

Trading the Cup and Handle Chart pattern

One of the rare chart patterns, the Cup and Handle Chart pattern or cup and saucer pattern is a very long term chart pattern can take a lot of time to form. This is a very reliable chart pattern and typically offers a very low risk compared to the rewards. The cup and handle pattern is formed when prices tend to bottom out, forming a gradual decline and then a smooth rally higher. It is this formation that gets the name of a cup. Upon reaching the previous support level, prices tend to break the support turned resistance only to fall back a small distance, forming a handle.

The eventual break out from the handle, offers an immediate target to the resistance level and a measured distance of the bottom to the top of the cup formation, projected from the resistance level that is broken.

The chart below shows a typical “cup-and-handle” formation with the measured targets.

Figure 1: Cup and Handle Chart Pattern

The cup and handle pattern can be found in any time frame, however, it is advisable to only trade the cup and handle patterns on time frames of above H1 as these are more valid to trade.

Figure 2 below, gives an example of the cup and handle chart formation on the EURCAD pair, daily time frame. Here, we can notice how price declined to form a bottom and start to rise gradually upwards. The main points of interest are the first support level that forms the left side of the cup which gave way for steep declines. On the rally back, this same level now acts as resistance and therefore prices react in the first attempt and drop back lower.

Figure 2: Cup and Handle, Trade Example

After a minor decline, another attempt is made, this time being successful.

As with the above example, the ideal point of entry to trade this pattern is the break out of the small handle or down sloping channel. If you look closely at the handle, it is nothing but a bullish flag pattern, which, as we know is a continuation pattern. Therefore, taking long positions on break out of this handle or flag pattern with stops below the most immediate dip before the rally could see a very low risk trade in regards to the high profit potential the cup and handle pattern can represent.

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The only problem with the cup and handle pattern is that does not appear that frequently and therefore, there may not be many trade opportunities coming your way. An alternative way to find out the cup and handle patterns is to first spot the bullish flag and immediate scan to the left of the chart. If you notice a rounding bottom price pattern, make use of the drawing tools to see if the cup and handle formation can be validated and then identify the support level.

In some cup and handle formations, prices when consolidating near the handle can decline a bit steeper. Therefore, it is essential to not hurry into a trade, but to wait for a successful break out and possibly a retest of the handle’s break out.

When the handle’s decline is steep, always make sure to target the support/resistance level of the cup and make it your first target followed by the eventual target which is the measured height of the cup, projected after the resistance is broken.

In conclusion, the cup and handle chart pattern is simple and easy to trade. With due practice, traders can train their eye to spot the cup and handle formations. The biggest advantage of trading this chart pattern is the very small risk to the high rewards that this pattern has to offer.

Cup and Handle Definition

What Is A Cup And Handle?

A 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.

Key Takeaways

  • 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’s a Cup and Handle?

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. 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.

A profit target is determined by measuring the distance between the bottom of the cup and the pattern’s breakout level, and extending that distance upward from the breakout. For example, if the distance between the bottom of the cup and handle breakout level is 20 points, a profit target is placed 20 points above the pattern’s handle. Stop loss orders may be placed either below the handle or below the cup depending on the trader’s risk tolerance and market volatility.

Now let’s consider a real-world historical example using Wynn Resorts, Limited (WYNN), which went public on the Nasdaq exchange near $13 in October 2002 and rose to $154 five years later. The subsequent decline ended within two points of the initial public offering (IPO) price, far exceeding O’Neil’s requirement for a shallow cup high in the prior trend. The subsequent recovery wave reached the prior high in 2020, nearly 10 years after the first print. The handle follows the classic pullback expectation, finding support at the 50% retracement in a rounded shape, and returns to the high for a second time 14 months later. The stock broke out in October 2020 and added 90 points in the following five months.

Limitations Of The Cup And Handle

Like all technical indicators, the cup and handle should be used in concert with other signals and indicators before making a trading decision. Specifically with the cup and handle, certain limitations have been identified by practitioners. First is that it can take some time for the pattern to fully form, which can lead to late decisions. While one month to one year is the typical timeframe for a cup and handle to form, it can also happen quite quickly or take several years to establish itself, making it ambiguous in some cases. Another issue has to do with the depth of the cup part of the formation. Sometimes a shallower cup can be a signal, while other times a deep cup can produce a false signal. Sometimes the cup forms without the characteristic handle. Finally, one limitation shared across many technical patterns is that it can be unreliable in illiquid stocks.

How to Trade the Cup and Handle Chart Pattern

How to Enter and Exit This Powerful Pattern

Chart patterns occur when the price of an asset moves in a way that resembles a common shape, like a triangle, rectangle, head and shoulders, or—in this case—a cup and handle. These patterns are a visual way to trade. They provide a logical entry point, a stop-loss location for managing risk, and a price target for exiting a profitable trade. Here’s what the cup and handle is, how to trade it, and things to watch for to improve the odds of a profitable trade.

The Cup and Handle

The cup and handle pattern occurs in both small time frames, like a one-minute chart, and in large time frames, like daily, weekly, and monthly charts. It occurs when there is a price wave down, followed by a stabilizing period, followed by a rally of approximately equal size to the prior decline. It creates a U-shape, or the “cup” in our “cup and handle.” The price then moves sideways or drifts downward within a channel—that forms the handle. The handle may also take the form of a triangle.

The handle needs to be smaller than the cup. The handle should not drop into the lower half of the cup, and ideally, it should stay in the upper third. For example, if a cup forms between $99 and $100, the handle should form between $100 and $99.50, and ideally between $100 and $99.65. If the handle is too deep, and it erases most of the gains of the cup, then avoid trading the pattern.

A cup and handle chart may signal either a reversal pattern or a continuation pattern. A reversal pattern occurs when the price is in a long-term downtrend, then forms a cup and handle that reverses the trend and the price starts rising. A continuation pattern occurs during an uptrend; the price is rising, forms a cup and handle, and then continues rising.

Entering a Cup and Handle Trade

Wait for a handle to form. The handle often takes the form of a sideways or descending channel or a triangle. Buy when the price breaks above the top of the channel or triangle. When the price moves out of the handle, the pattern is considered complete, and the price is expected to rise.

While the price is expected to rise, that doesn’t mean it will. The price could rise a little and then fall, it could move sideways, or it could fall right after entry. For this reason, a stop-loss is needed.

Setting a Stop-Loss

A stop-loss order gets a trader out of a trade if the price drops, instead of rallying, after buying a breakout from the cup and handle formation. The stop-loss serves to control risk on the trade by selling the position if the price declines enough to invalidate the pattern.

Place a stop-loss below the lowest point of the handle. If the price oscillated up and down a number of times within the handle, a stop-loss might also be placed below the most recent swing low.

Since the handle must occur within the upper half of the cup, a properly placed stop-loss should not end up in the lower half of the cup formation. For example, assume a cup forms between $50 and $49.50. The stop loss should be above $49.75 because that is the half-way point of the cup. If the stop-loss is below the half-way point of the cup, avoid the trade. Ideally, the stop-loss should be in the upper third of the cup pattern.

By having the handle and stop-loss in the upper third (or upper half) of the cup, the stop-loss stays closer to the entry point, which helps improve the risk-reward ratio of the trade. The stop-loss represents the risk portion of the trade, while the target represents the reward portion.

Picking a Target or Profitable Exit

Whatever the height of the cup is, add that height to the breakout point of the handle. That figure is the target. For example, if the cup forms between $100 and $99, and the breakout point is $100, the target is $101.

Sometimes the left side of the cup is a different height than the right. Use the smaller height, and add it to the breakout point for a conservative target. Or use the larger height for an aggressive target.

A Fibonacci extension indicator may also be used. Draw the extension tool from the cup low to the high on the right of the cup, and then connect it down to the handle low. The one-level, or 100%, represents a conservative price target, and 1.618, or 162%, is a very aggressive target. Therefore, targets can be placed between one and 1.618.

If you’re day trading and the target is not reached by the end of the day, close the position before the market closes for the day. A trailing stop-loss may also be used to get out of a position that moves close to the target but then starts to drop again.

Considerations

Traditionally, the cup has a pause, or stabilizing period, at the bottom of the cup, where the price moves sideways or forms a rounded bottom. It shows the price found a support level and couldn’t drop below it. It helps improve the odds of the price moving higher after the breakout.

A V-bottom, where the price drops and then sharply rallies may also form a cup. Some traders like these types of cups, while others avoid them. Those that like them see the V-bottom as a sharp reversal of the downtrend, which shows buyers stepped in aggressively on the right side of the pattern. Opponents of the V-bottom argue that the price didn’t stabilize before bottoming, and therefore, the price may drop back to test that level. Ultimately, if the price breaks above the handle, it signals an upside move.

If the trend is up, and the cup and handle forms in the middle of that trend, the buy signal has the added benefit of the overall trend. In this case, look for a strong trend heading into the cup and handle. For additional confirmation, look for the bottom of the cup to align with a longer-term support level, such as a rising ​trendline or moving average.

If the cup and handle forms after a downtrend, it could signal a reversal of the trend. To improve the odds of the pattern resulting in a real reversal, look for the downside price waves to get smaller heading into the cup and handle. The smaller down waves heading into the cup and handle provide evidence that selling is tapering off, which improves the odds of an upside move if the price breaks above the handle.

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