how to trade the cup and handle
there are several ways to approach trading the cup and handle but the most basic is to look for entering a long position 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 image by julie bang investopedia 2020a 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 example trading the cup and handlenow 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 45 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 2011 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 2013 and added 90 points in the following five months 6image by julie bang investopedia 2020limitations of the cup and handle patternlike 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 the 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 