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High-Probability Trade Setups: A Chartist's Guide to Real-Time Trading by Tim Knight

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Chapter 6

Cup with Handle

The cup-with-handle pattern is one of the most recognizable and popular patterns in technical analysis. As the name suggests, the pattern looks like a cup and handle as viewed from the side. That is, a rounded saucerlike shape is followed by a much smaller saucer (approximately even with the upper levels of the big saucer) and then is followed by a breakout to higher prices.

DEFINITION OF THE PATTERN

The criteria for this pattern are as follows:

  • Prior Uptrend: Since this is often a continuation pattern, it is most desirable for there to be an uptrend preceding the pattern, although this is not a requirement, as examples in this chapter will show.
  • U-Shaped Cup: The cup portion of the pattern should be relatively smooth and round, as opposed to a sharp V-shaped pattern.
  • Similar Highs: The highs on the left and right sides of the cup should be roughly equal, and these highs in turn should be equal to the highs of the handle.
  • Partial Retracement by Handle: The drop in price contained within the handle should be only a modest part of the range between the cup's high and low. In other words, if the cup spans a range of $10 to $16, the handle shouldn't dip very much below the high price of $16. A good rule of thumb is no more than one-third of the range, which in this example would suggest a handle no lower than $14 in price.
  • Breakout: The price should break out above the top of the handle and continue on to its target price.

The target price is the value ...

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