Spencer Li

5 Biggest Day Trading Mistakes that Beginners Make

Biggest Day Trading Mistakes that Beginners Make

Why do new traders always lose out to professional traders? What is the extra edge that professional traders have that allow them to always win in the long run against new traders? And why do new traders tend to make the same day trading mistakes?

Back when I was trading professionally in a private equity fund, when I was sitting next to veteran traders with 20, 30 years of experience who were literally moving millions of dollars, I was fortunate to have the chance to observe the way they trade.

And I also got the chance to see many new traders come and go. And to see the kind of trading mistakes that they made.

And I realized that for retail traders, if you want any chance of competing with these professional traders, you need to be able to understand and learn certain key skills and avoid key day trading mistakes that will kill your trading account.

If you would like to learn all the essential elements to kickstart your trading journey, also check out: The Beginner’s Guide to Trading & Technical Analysis

 

5 Biggest Day Trading Mistakes that Beginners Make

Day Trading Mistake #1 No Solid Trading Plan

The trading plan is the foundation of all your trading endeavors. Imagine once the market is open and prices are moving, the charts are moving, it gets very emotional.

Once the market is open, you should purely be focused on executing your trades. All the time, all the focus and energy should be in the execution.

So even before the market opens, before you even place your first trade, you need to have a solid plan that will tell you:

  • What you are going to trade, what is the trading strategy
  • What is the trading style, where you’re going to enter your trades?
  • Where you are going to exit your trades
  • How much you’re going to risk per trade?

All of these are important things that should go into your trading plan.

So the moment the market opens, or the moment you get ready to place a trade, the focus should be on the execution, because you are supposed to be just strictly executing your trading plan.

 

Day Trading Mistake #2 Lack of Practice

If you think back when you first started to learn how to drive, you did not just go into the car and start driving immediately.

You first had to familiarize with, “what does this button do?” “What does this lever do?’

You actually had to familiarize with the whole process of driving because you cannot be trying to drive on the road, and at the same time, figure out how the different parts of the car works.

The same theory applies to trading.

When the market in session, you want to be focused on executing your trading plan as efficiently as possible, to avoid making any day trading mistakes.

You need to be familiar with, “how do you execute the trade?” “How do you key in the orders?”

You really need to be very familiar with the whole process to be able to do this.

What you should be doing, even before you go into live trading, perhaps like paper trading, virtual trading, such that you get used to the whole process of trading without taking the unnecessary risk of losing your money.

 

Day Trading Mistake #3 Wrong Psychology

The next common day trading mistake is not having the correct psychology or mindset. There are a lot of different things that can affect you mentally when you are trading.

One of the biggest problem is actually the inability to cut losses. Most of us have this innate loss aversion. It’s one of the cognitive biases that we hate to lose money.

For new traders, the tendency is to not want to cut losses, even though you know that you are wrong.

If you follow your trading plan, it should have a strict stop loss area or price level.

But if you do not follow that, then your losses could really snowball and you end up blowing your trading account.

The second mistake of having a bad psychology is overtrading.

For new traders, they tend to see too many trading opportunities, whereas professional traders zoom in and only take the very best trades.

These new traders, they tend to see every trade as an opportunity, they are afraid of missing out on potential trading opportunities.

Whereas as a professional, you want to deliberately filter out as many bad trades as possible.

That is the kind of mentality of a professional versus an amateur trader.

And another mistake is revenge training, where you’ve already lost, and instead of calling it a day or resting to fight another day, you try to make back the money.

You try to earn back whatever you have lost, and that leads you to make poorer and poorer decisions because it no longer becomes about executing.

Your trading plan becomes “I don’t want to lose but I’m trading because I want to take revenge on the market. To teach it a lesson or to make back the money that I lost.”

So that is a very wrong approach to trading.

 

Day Trading Mistake #4 Being Too Greedy

The next day trading mistake is not having the correct progression. Just as with all skills in life, you need to learn it in a step by step basis.

Like when you are trying to learn how to swim, you do not jump right into the deep end of the pool.

You start off in the shallow pool and then you slowly progressively move up with the correct technique.

When it comes to trading, most new traders, especially if they start earning a little bit of money, they start to get complacent.

They start to think that, wow, I’m a genius. Everything, every trade I make turns to gold and they start trading more and more aggressively.

They’re thinking, wow, if I can make $50 a day, why not I increase my trading size and now, I can make like $500 a day.

Why not I increase it even more? I can make like $5,000 a day.

So what happens when you keep scaling up more and more?

There was a veteran trader who shared with me, he told me that all it takes is one bad trade.

No matter how good you are, whether you’ve been trading for 10 years, 20 years, 30 years, all it takes is one bad trade that if you break your rules that one bad trade can potentially blow up your whole account.

You hear stories of people making a lot of money, but because of one trade, and they don’t follow their rules, and they end up losing everything.

You must not let the greed control you. You must always be in control.

So with regards to progression, you need to scale up your account size gradually. Do not scale it up too fast.

One recommendation is to always scale it up by 1.5 times. For example, if you are trading a $10,000 account, And you have been consistent for say a month, then you scale it up to maybe a $15,000 account.

When you are consistent for another month, then you scale up by 1.5 times again.

If your consistency drops, you may want to scale back to $10,000 until you regain confidence.

The whole idea is to scale it gradually instead of just arbitrarily multiplying your account.

 

Day Trading Mistake #5 Lone Wolf Mentality

The last point is to not adopt a “lone wolf” mentality.

Now, maybe because you see it in movies or you hear a lot of stories of people going in as a lone wolf, as a solo top trader who disregards the opinions of everyone.

And they just go in alone, they make a lot of money and they make a lot of enemies.

So I will say that is the lone wolf theory/approach.

But in reality, if you watch nature shows, wolves usually hunt in a pack and that is when they are most effective.

If you are working with a community of traders and if you have a mentor, there’s no need to be selfish, or wanting to be the best or wanting to be better than other people.

If there’s a good trading opportunity, and you share it with other people, it doesn’t mean you earn less.

Everyone can take the same opportunity. And when they have good opportunities, they will share it with you as well.

When we were working as a professional trading team, we share ideas with one another, we work together. Everyone gets more trading ideas.

Another upside of having a community is that you get to learn from each other’s mistakes, so you can avoid making the same day trading mistakes that others have made.

Summary of Day Trading Mistakes

So I’ve just covered the top 5 day trading mistakes that beginners make.

And just to sum it up. The five key points are:

  1. You need to have a solid trading plan.
  2. You want to have a lot of practice before you go into live trading.
  3. You want to adopt the correct trading psychology and mentality.
  4. You want to scale up your account progressively.
  5. And lastly, think in terms of abundance.

Do not try to go in as a lone wolf in the markets because the lone wolf gets eaten. Whereas if you hunt in the pack, it’s a lot easier to be profitable in the long run.

Now that I’ve shared the top 5 most common day trading mistakes that beginners make, what were some of the difficulties you faced when you were starting off as a new trader?

Do let me know in the comments below.

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Spencer Li

What Do You Want to Achieve in 2021?

2020 09 21 14.57.51 1

What Do You Want to Achieve in 2020

I think enough has been said about how life-changing 2020 was, because of how it forced us to take a break from routine, and allowed us to step out of our comfort zones.

Change is a good catalyst for growth, and gives us new perspectives on what is really important in life.

Before diving into 2021, let just do a brief review of 2020.

Review of 2020

  • Markets were a wild ride, but provided great opportunities to ride strong trends, such as Tesla, Bitcoin, etc. This gave us one of the best years of returns.
  • Exercised 3-4 times a week, including tennis, gym, swimming, running, yoga.
  • Used to have a bad habit of sleeping late, finally managed to keep to a timing of 12-8am, giving me 8 hours of sleep a day.
  • Became a certified sports massage therapist, after 7 weeks of training (70+ hours) and a final practical exam.
  • Started meditating 15-3o mins a day.
  • Stopped eating hawker food and started eating healthier, including more fruits and vegetables with every meal.
  • Managed to bulk up from 55kg to 60kg.
  • Read up a lot and worked on relationships.
  • Since I could not travel overseas, I explored a lot of new places within Singapore:
  • Spent a decent amount of time with close friends and family, meeting everyone at least once a week.
  • Watched 110 movies and TV series – that’s way too many lol
  • Only read about 40 books

 

What Do You Want to Achieve in 2021

Plans for 2021

  • Planning to create a lot more useful articles and videos for this blog.
  • Planning to continue meditating daily, and increase to 45 minutes a day.
    • If possible, go on a meditation retreat.
    • Incorporate mindfulness as part of daily life.
  • Continue sleeping from 12-8am daily, with 8 hours of sleep.
  • Continue exercising 3-4 times a week, including tennis, gym, swimming, running, yoga.
    • Work on increasing flexibility and strengthening core muscles to reduce injuries.
  • Continue bulking, next goal is to go from 60kg to 65kg.
  • Continue to eat healthy, cut down on sugar, salt, processed foods.
  • Continue to work on relationships.
  • Learn how to drive (again). I have a license, but I have not driven for more than 10 years.
  • Learn how to cook and bake.
  • Read more books and watch less TV.
  • Travel more, if possible.
  • Try some new things that are out of your comfort zone.

 

As I reach the big 35 this year, I hope I do not have a midlife crisis, but instead get some wisdom and clarity about what is important in life.

“A Calm Mind, a Fit Body, a House Full of Love” – Naval

 

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If you are excited to get more life hacks, also check out: “Beyond Financial Freedom: An Unofficial Guide to Living Your Best Life”

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Spencer Li

Ascending Triangle & Descending Triangle Pattern Strategy Guide (Updated 2025)

triangle pattern trading strategy

The triangle price pattern is a type of continuation price pattern, where prices get compressed and converge over time, until price breaks out in either direction.

There are 3 different types of triangle patterns – the symmetrical triangle, the ascending triangle, and the descending triangle, each with different trading strategies.

In this post, I will show you how to take advantage of the triangle pattern to trade breakouts, how to avoid false breakouts, and the best trading strategies for this price pattern.

 

Triangle & Descending Triangle Pattern Strategy Guide

 

What are Triangle Price Patterns?

A triangle pattern, as its name suggests, is a triangular consolidation range in which prices moves about.

Triangle & Descending Triangle Pattern Strategy Guide 2

The triangle pattern generally represents a medium-term consolidation of prices, and is usually found in the mid/late stages of a trend.

Since it is a medium-term pattern, the triangle pattern usually consists of 50-100 bars, and most of the time results in prices breaking out in either direction as prices get compressed.

As prices get squeezed towards the tip of the triangle, prices will be forced to break out of the pattern, and the direction is takes will depend on the type of triangle.

There are 3 main varieties of triangles – namely the ascending triangle, the descending triangle, and the symmetrical triangle, and we will be going through each one in more detail later on.

 

Triangle Pattern Psychology

In the triangle pattern, bulls (buyers) & bears (sellers) are fighting and both sides are trying to gain control. Bulls want higher highs and higher lows, while bears want lower highs and lower lows.

Triangle & Descending Triangle Pattern Strategy Guide 3

As the fight intensifies, uncertainty increases and volume decreases, as the range of prices start narrowing, so both bulls and bears choose to wait on the sidelines until the direction becomes clear before jumping in again.

That is why once a breakout occurs, price and volume tends to spike, as all the buyers or sellers waiting on the sidelines start making their move.

 

How to Tackle Each Type of Triangle Pattern

As we have seen, all triangles consist of 2 sloping lines which converge, but the main difference lies in the gradient for each pairs of lines.

  • Symmetrical triangle – both lines are sloping inwards (top line slopes down and bottom line slopes up)
  • Ascending triangle – top line is flat, while bottom lines slopes up
  • Descending triangle – bottom line is flat, while top line slopes down

Triangle & Descending Triangle Pattern Strategy Guide 4

The slope of these lines have a great significance, which I will cover in greater detail by going through each triangle pattern.

a) Symmetrical Triangle Price Pattern

The symmetrical triangle with its converging lines show that both sides (buyers and sellers) are equally matched, which makes it hard to predict which side the breakout is going to happen.

Since it is a continuation pattern, the odds will tend to favour direction of the existing trend, but it is still much harder to trade compared to the next 2 triangle patterns.

b) Ascending Triangle Price Pattern

The ascending triangle, with its bottom line sloping up, shows a bullish bias, as this indicates a series of higher lows.

Recap: A series of higher lows and higher highs is an uptrend.

The flat line on top, which now serves as resistance, becomes a clear level for price to attack and break, and if it succeeds, will lead to higher highs.

Hence, there is a higher probability of an upside breakout for the ascending triangle, especially if it forms in the middle of an existing long-term uptrend.

c) Descending Triangle Price Pattern

The descending triangle, with its top line sloping down, shows a bearish bias, as this indicates a series of lower highs.

Recap: A series of lower highs and lower lows is a downtrend.

The flat line at the bottom, which now serves as support, becomes a clear level for price to attack and break, and if it succeeds, will lead to lower lows.

Hence, there is a higher probability of a downside breakout for the descending triangle, especially if it forms in the middle of an existing long-term downtrend.

 

Triangle Pattern Trading Strategies

There are 2 main strategies, which focus on the directional triangles (ascending triangle and descending triangle), and the difference lies in how early to enter the breakout when it happens.

  1. Breakout Entry: Enter immediately
  2. Pullback Entry: Wait for a pullback after the breakout

Triangle & Descending Triangle Pattern Strategy Guide 5

Something to take note of, breakouts usually occur when prices are around 2/3 to 3/4 of the pattern length, and if prices go past the 3/4 mark, there is a possibility that prices may just continue to meander sideways without breaking out. This would mean a failed pattern.

Now, let’s go through each strategy in greater detail.

 

Trading Strategy #1: Breakout Entry

Our first strategy for the triangle price pattern is to enter on the breakout of an ascending triangle or descending triangle pattern.

Triangle & Descending Triangle Pattern Strategy Guide 6

As mentioned previously, a triangle is a compression of prices while buyers and sellers wait on the sidelines for a breakout. For this setup, we will be looking to enter just as the breakout happens.

In the example above, we see a prior uptrend, so we know the odds for an upside breakout are higher.

As the ascending triangle forms, we see a series of higher lows (and similar highs) forming, showing a gradual build-up of bullish pressure. We also see prices pushing against the resistance level formed by the similar highs.

Finally, the resistance gives way, and prices through.

For trading, we would look to enter near the point of breakout, keeping an eye for strong price action and volume to support the breakout. We can also use the breakout bar(s) to place a stoploss.

Note that this strategy works just as well with a descending triangle, you’ll just have to flip the pattern around for a downside breakout.

This strategy works best if the prior trend (before forming the triangle pattern) is strong, and has a higher chance of success if the triangle is smaller, in terms of height and duration.

 

Trading Strategy #2: Pullback Entry

Our next strategy for the triangle price pattern is to enter on a pullback after the initial breakout.

Triangle & Descending Triangle Pattern Strategy Guide 7

As covered in the previous setup, one of the ways to trade an ascending triangle or descending triangle is to enter the moment price breaks out of pattern.

However, sometimes the odds of a successful breakout might be lower, for example if the triangle pattern is large (more uncertainty), or the pattern goes against the prior trend (bullish ascending triangle in a downtrend, or bearish descending triangle in an uptrend).

In the example above, we see a prior uptrend, followed by a bearish descending triangle. This sets up up a little contradiction, which suggests that the breakout might not be as strong or as clear-cut.

Therefore, when the breakout happens, instead of entering the trade immediately, we wait to see if there is a pullback to test the support-turned-resistance level (which was the flat line of the descending triangle).

For trading, we would look to enter once the pullback is completed, and prices start to head back down. The end of the pullback would also be a good place to put your stoploss.

Note that this strategy works just as well with an ascending triangle, you’ll just have to flip the pattern around for an upside breakout.

 

Which Triangle Pattern to Avoid?

You might have noticed that I left out the symmetrical triangle in both the strategies mentioned earlier.

The reason is that I find the symmetrical triangle the least reliable pattern of the 3 triangle patterns.

This is because it is hard to confirm a successful breakout of this pattern, and even harder to determine a good entry point.

Triangle & Descending Triangle Pattern Strategy Guide 8

In the example above, prices have broken out to the upside of the symmetrical triangle pattern.

However, because of the nature of the pattern, there will still be another high (or low, if it broke to the downside) which prices have to surpass, and it becomes a resistance level.

As a result, even after the breakout, we are not sure if prices have starting trending, or whether prices are still within a wider range.

We can only be sure after prices have broken the new resistance level and continues climbing, in which case the original symmetrical triangle breakout did not really have much significance or trading opportunity.

Hence, I would prefer to focus on those patterns which have a more predictable outcome.

 

Profit Target for the Triangle Pattern

Once a triangle pattern is completed, one of the most useful things about it is its ability to provide a price projection, which can be used to estimate a minimum profit target for your trade.

This can be done by taking the maximum height of the triangle, and projecting that distance from the breakout point.

Triangle & Descending Triangle Pattern Strategy Guide 9

In the chart above, the maximum height of the triangle is indicated by the blue rectangular box, which is then used as a price projection at the breakout point.

The black horizontal arrow indicates the price level which serves as the minimum profit target for the triangle pattern breakout.

This price projection technique can be used in conjunction with other methods, such as support and resistance levels, and if there is any confluence, gives an added layer of confirmation.

 

Tips from the Trading Desk

  1. Trade with the larger trend, as breakouts are more likely to happen in the same direction as the prior trend
  2. Watch out for triangles that are themselves a part of a larger price pattern
  3. Look out for major support and resistance levels

Triangle & Descending Triangle Pattern Strategy Guide 10

As you can see from the chart above, this is an example of trend trading using the triangle pattern, because the triangle formed is actually a consolidation pattern within the major trend, so this whole triangle is actually a pullback opportunity to enter the underlying trend.

Although we generally do not like trading symmetrical triangles, the odds in this case are better than 50-50 because there us a higher chance of an upside breakout due to the context (triangle pattern pullback in major uptrend).

Besides strong trends, triangle patterns can also form near the edges of support or resistance levels, when prices are trying to push through that price level, so you might see them near the necklines of other patterns, such as the double top/bottom, or head and shoulders pattern.

In a sense, the triangle pattern becomes part of these larger patterns depending on the context.

Now that I have shared all about the triangle pattern, what is your favourite triangle pattern strategy for trading?

Let me know in the comments below.

 

thumbnail the definitive guide to trading price chart patterns

If you would like to learn all the different price chart patterns, also check out: “The Definitive Guide to Trading Price Chart Patterns”

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Spencer Li

Head and Shoulders Pattern Trading Strategy Guide (Updated 2025)

final draft how to trade heads and shoulders new 2021

The head and shoulders and inverse head and shoulders are a type of common reversal pattern found at the end of major trends.

The bearish version is called the head and shoulders pattern, while the bullish version is called the inverse head and shoulders pattern.

In this post, I will show you how to take advantage of the head and shoulders pattern to identify major market reversals, and the best trading strategies for this price pattern.

 

Head and Shoulders Pattern Trading Strategy Guide

 

What is a Head and Shoulders Pattern?

The head and shoulders and inverse head and shoulders are another type of common reversal patterns found at the end of major trends.

What is a Head and Shoulders Pattern

When prices are unable to surpass the prior swing high (the head) and forms a lower high (the shoulder) instead, this forms the bearish head and shoulders reversal pattern.

When prices are unable to surpass the prior swing low (the head) and forms a higher low (the shoulder) instead, this forms the bullish inverse head and shoulders reversal pattern.

 

Head and Shoulders Pattern Psychology

Here is a quick recap of the 2 types of patterns:

  • Head and shoulders pattern – bearish reversal
  • Inverse head and shoulders pattern – bullish reversal

Head and Shoulders Pattern Psychology (Bearish Reversal)

In the head and shoulders pattern, bulls (buyers) are originally in control of the market, and the market is in an uptrend.

What is a Head and Shoulders Pattern 2

At some point in time, bears (sellers) try to take control, pushing down prices, which creates the “left shoulder” of the pattern.

Bulls resume control and push prices to new highs, which forms the “head” of the pattern.

Bears try to fight for control again, pushing prices back down to the level of its first push.

Bulls try one last time to resume control by pushing prices up, but it is unable to make new highs. This forms the “right shoulder” of the pattern.

Finally, bears take full control and push prices further down.

Bears are now in control of the market, and the market is in a downtrend.

Inverse Head and Shoulders Pattern Psychology (Bullish Reversal)

In the inverse head and shoulders pattern, bears (sellers) are originally in control of the market, and the market is in a downtrend.

What is a Head and Shoulders Pattern 3

At some point in time, bulls (buyers) try to take control, pushing up prices, which creates the “left shoulder” of the pattern.

Bears resume control and push prices to new lows, which forms the “head” of the pattern.

Bulls try to fight for control again, pushing prices back up to the level of its first push.

Bears try one last time to resume control by pushing prices down, but it is unable to make new lows. This forms the “right shoulder” of the pattern.

Finally, bulls take full control and push prices further up.

Bulls are now in control of the market, and the market is in an uptrend.

 

Head and Shoulders Pattern Trading Strategies

There are 3 main strategies, which focus on the taking advantage of the change in trend, and the difference lies in how early to enter the reversal when it happens.

  1. Early Entry: Enter immediately
  2. Pre-Breakout Entry: Enter immediately
  3. Pullback Entry: Wait for a pullback after the breakout

What is a Head and Shoulders Pattern 4

Since the head and shoulders is a reversal pattern, we can expect to see its swing counts change as the pattern unfolds.

For the bearish reversal of the head and shoulders pattern, we see the swing counts change from a series of higher highs and higher lows, to one of lower highs and lower lows.

For the bullish reversal of the inverse head and shoulders pattern, we see the swing counts change from a series of lower highs and lower lows, to one of higher highs and higher lows.

For all 3 strategies, they involve entering a position at various stages during this transition of swing counts.

Now, let’s go through each strategy in greater detail.

 

Trading Strategy #1: Early Entry

Our first strategy for the head and shoulders price pattern is to enter early as the 2nd shoulder (right shoulder) is forming, by using the 1st shoulder (left shoulder) as a guide.

What is a Head and Shoulders Pattern 5

As mentioned previously, the head and shoulders pattern is a reversal pattern, and we can expect to see swing counts change as the pattern unfolds.

The early entry takes advantage of this by shorting on the first LH (bearish H&S reversal), or going long on the first HL (bullish inverse H&S reversal). You can scroll up to the previous infographic (entries in head & shoulders pattern) to observe where the colour changes.

In the examples above, we see a prior trend, followed by the head and shoulders pattern which attempts to change the direction of the trend.

The first sign of the change of trend comes from the 2nd shoulder (right shoulder), because it is not able to reach the same level or exceed the head, which shows that the existing trend is weakening.

Most of the time, the 2nd shoulder (right shoulder) will form at roughly the same level as the 1st shoulder (left shoulder). This means that we can pre-empt the potential turning point of prices, and use that for our early entry.

For trading, we would look to enter near the point of the 2nd shoulder, keeping an eye for reversal candlestick bars/price action and volume which signals that momentum is weakening and it cannot go past the shoulder level.

We can then look to place our stoploss (SL) somewhere between the shoulder and the head levels.

This strategy works best if the price movement to resume the current trend is weak, and looks to be struggling just to touch the shoulder level, which suggests that it will most likely not be able to go past.

 

Trading Strategy #2: Breakout Entry

Our second strategy for the head and shoulders price pattern is to enter on the breakout/breakdown of the neckline.

What is a Head and Shoulders Pattern 6

As mentioned previously, the head and shoulders pattern is a reversal pattern, and we can expect to see swing counts change as the pattern unfolds, meaning a LH & LL if we want to short, and a HL & HH if we want to go long.

In the previous strategy (early entry), the entry was given on the first LH (shorting a bearish H&S reversal), or the first HL (going long on a bullish inverse H&S reversal).

In this strategy (breakout entry), the entry is given on the LL (shorting a bearish H&S reversal), or the HH (going long on a bullish inverse H&S reversal). Breaking the neckline automatically gives rise to a LL and HH respectively.

In the examples above, we can see the neckline (blue horizontal line) which denotes this crucial price level. Sometimes, if there is no clear neckline, this might result in a zone, or multiple necklines.

For trading, we would look to enter just as the breakout occurs at the neckline, keeping an eye for strong price action and volume which signals conviction in the breakout.

We can then look to place our stoploss (SL) somewhere between the neckline and the 2nd shoulder (right shoulder).

This strategy works best if there is a clear neckline which price is trying to break, followed by strong price momentum on the breakout.

If the price action is choppy/volatile, or if the neckline is not clear, then it would be better to wait for a pullback and use Strategy #3 (pullback entry) instead.

 

Trading Strategy #3: Pullback Entry

Our third strategy for the head and shoulders price pattern is to wait for the break of the neckline to occur (Strategy #2), then enter on the 1st pullback after that happens.

What is a Head and Shoulders Pattern 7

As mentioned previously, the head and shoulders pattern is a reversal pattern, and we can expect to see swing counts change as the pattern unfolds.

In the previous strategies, we shorted on a LH (Strategy #1) and LL (Strategy #2); or went long on a HL (Strategy #1) and HH (Strategy #2).

In Strategy #3, we will be shorting on the next LH (LH > LL > LH), or going long on the next HL (HL > HH > HL).

Therefore, since the new trend is slightly more established, the chance of success is higher, but the reward-to-risk ratio (RRR) will not be as good as the prior strategies. As we mentioned many times before, every trade is a trade-off between the hit rate and the RRR.

In the examples above, we can see where the 1st pullback occurs (yellow highlight), depending on which neckline you treat as the breakout.

Most of the time, the pullback will retrace to touch the neckline, but if the breakout momentum is strong, the pullback may not come all the way back to the neckline.

For trading, we would look to enter near the point of the pullback (usually near the neckline), keeping an eye for reversal candlestick bars/price action and volume which signals that momentum is weakening and it cannot go past the neckline.

We can then look to place our stoploss (SL) somewhere between the neckline and the 2nd shoulder (right shoulder).

If you have already entered a position during the breakout, this strategy can be an opportunity for you to add on more positions.

 

Profit Target for the Head and Shoulders Pattern

Once a head and shoulders pattern is completed, one of the most useful things about it is its ability to provide a price projection, which can be used to estimate a minimum profit target for your trade.

This can be done by taking the maximum height of the pattern (distance from the head to the neckline), and projecting that distance from the breakout point.

If the neckline is not clear or there are multiple necklines, it is advisable to go with the most conservative option, and use a smaller projection.

What is a Head and Shoulders Pattern 8

In the chart above, the maximum height of the head and shoulders pattern is indicated by the blue rectangular box, which is then used as a price projection at the breakout point.

The horizontal arrow indicates the price level which serves as the minimum profit target for the head and shoulders pattern breakout.

This price projection technique can be used in conjunction with other methods, such as support and resistance levels, and if there is any confluence, gives an added layer of confirmation.

 

Tips from the Trading Desk

  1. Make sure the trend is in the late stage – the longer the trend has been running, the more exhausted it is likely to be.
  2. Use the completed pattern for price projection – shoulders tend to be roughly the same height.
  3. The size of the pattern should be proportional to the trend it is trying to reverse.

What is a Head and Shoulders Pattern 9

As you can see from the chart above, this is an example of a strong trending market (3 green rectangle boxes), which ended in a head and shoulders bearish reversal (1 red rectangular box).

This means that for the whole move up, if we only measure the vertical distance (height), the trend accounts for 75%, and the reversal pattern accounts for 25%. This is within the healthy range, meaning the pattern size is proportional to the whole trend.

Typically, a reversal pattern works best when its height is about 25% to 33% (1/4 to 1/3) of the whole move.

If the pattern size is less than 25%, the pattern is too small to reverse the trend, which means that it might likely lead to a consolidation before the trend resumes, or the reversal pattern is still in the midst of forming, and might evolve to something bigger.

If the pattern is large than 33%, the pattern is too large to be classified as a head and shoulders pattern, and it could just be large swings within a wide range.

I have not come across any authors talk about price pattern proportionality in any books, but I see a lot of new traders making this mistake when trying to identify price patterns. And this applies to other price patterns as well.

Now that I have shared the various trading strategies for the head and shoulders price pattern, which is your favourite strategy?

Let me know in the comments below.

 

thumbnail the definitive guide to trading price chart patterns

If you would like to learn all the different price chart patterns, also check out: “The Definitive Guide to Trading Price Chart Patterns”

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Spencer Li

Cup and Handle Pattern Trading Strategy Guide (Updated 2025)

cup and handle pattern trading strategy

The cup and handle is an accumulation buying pattern, which is found during long periods of consolidation, and can lead to powerful explosive moves once the pattern is fully completed.

There are 2 main varieties of this pattern – the cup and handle reversal pattern, and the cup and handle continuation pattern.

In this post, I will show you how to take advantage of the cup and handle pattern to trade breakouts, how to avoid false breakouts, and the best trading strategies for this price pattern.

 

Cup and Handle Pattern Trading Strategy Guide

 

What is a Cup and Handle Price Pattern?

The cup and handle is an accumulation buying pattern, which is found during long periods of consolidation, and can lead to powerful explosive moves once the pattern is fully completed.

In the diagram below, you can see that the price pattern consists of a larger accumulation base (the cup), before forming a smaller accumulation base (the handle), before finally leading to a breakout.

What is a Cup and Handle Price Pattern

From a practical viewpoint, we will usually start to notice the pattern only when it starts forming the “cup” part of the pattern, which is quite identifiable by the smooth gradual curve upwards of trending swing counts of higher highs and higher lows on the chart.

The confirmation will come from the “handle” part of the price pattern, which is like a small pullback before the price explodes upwards. You can think of it as pushing down on a loaded spring, to build up more pressure just before the release.

 

The 2 Types of Cup and Handle Patterns

Unlike other chart patterns, the cup and handle pattern does not work equally for both the bullish and bearish scenario, as it is almost exclusively found in the bullish scenario only. Hence, we don’t hear people talking about “bullish cup and handle” or “bearish cup and handle”, because when they say “cup and handle”, it is understood to refer to the bullish version.

Based on the 2 main categories of chart patterns (continuation vs reversal), most people tend to classify the cup and handle pattern under the “Reversal Patterns” category, however I feel that the cup and handle can be both a reversal or continuation pattern.

In the diagram below, I illustrate the 2 different types of cup and handle patterns.

The 2 Types of Cup and Handle Patterns

a) Cup and Handle Reversal Pattern

In the reversal cup and handle, prices start off in a prolonged downtrend, where they gradually lose momentum and become more sideways. Prices start to bottom out and form a reversal base, before leading to a change in direction.

b) Cup and Handle Continuation Pattern

In the continuation cup and handle, prices are on an existing uptrend, and when the trend loses some steam or takes a pause, prices start to move sideways. The cup and handle pattern helps to buy up more buying pressure, before prices break to new highs and resume the uptrend.

In both scenarios, the context is very different, but the pattern is the same, and can be traded in exactly the same way.

 

Cup and Handle Pattern Psychology

In the cup and handle pattern, as the downtrend starts to weaken (less bears/sellers), the bulls/buyers start trying to take control from the bears, by gradually accumulating long positions.

Cup and Handle Pattern Psychology

As they build up their positions, we start to see a wide U-shape bottom (the cup), where bulls and bears are almost balanced. This suggests that the bears are no longer in control, and the downtrend has been neutralized.

In the final stage, where the handle forms, this is where the final battle of the bulls and bears take place.

By this time, the bulls have the upper hand as they have been accumulating positions during the cup formation, which in turn attracts more buyers.

Once the last bears are killed, bulls take full control, and the explosive price breakout takes place.

 

Cup and Handle Pattern Trading Strategies

There are 2 main strategies, which focus on the final battle between the bull and bears, because that is usually the tipping point where large explosive moves happen once the bears give up and get overwhelmed by the bulls.

  1. Pre-Breakout Entry: Enter before the breakout
  2. Pullback Entry: Wait for a pullback after the breakout

Cup and Handle Pattern Trading Strategies

Since the cup and handle is inherently a bullish pattern, the basic idea is to look for low risk buying opportunities to enter.

Looking at the diagram above, you might think that the best place to enter a trade is during the cup phase, because you can get the best entry price.

However, during the cup phase, the odds are 50-50, and there is no real edge, because the market is still sideways at that point of time.

In addition, the cup phase might last a really long time, and may not lead to a handle.

Hence, it makes more sense to make good use of your trading capital, and only enter the trade as the action is about to start.

The first opportunity would be to enter during the handle phase before the breakout, but if you miss that, they next best chance is to enter on the first pullback after the breakout.

Now, let’s go through each strategy in greater detail.

 

Trading Strategy #1: Pre-Breakout Entry

Our first strategy for the cup and handle price pattern is to enter just before the completion of the pattern, during the handle formation.

Cup and Handle Pattern Trading Strategies 1

During the cup formation, buyers would have been accumulating long positions and building bullish pressure, with the occasional test of the resistance level by trying to break out.

As the handle forms, it is very close to the breakout happening, and this provides a good low-risk opportunity to enter the trade just before the action begins.

Once the breakout happens, the price and volume is expected to surge, which would make it more challenging to enter a position, hence it is recommend to take a position before that.

For trading, we would look to enter during the handle formation, which would be very close to the resistance level.

We can then place a stoploss below the handle, and since the handle is usually pretty small relative to the pattern, the risk will not be very high.

 

Trading Strategy #2: Pullback Entry

Our next strategy for the cup and handle pattern is to enter on the first pullback after the initial breakout.

Cup and Handle Pattern Trading Strategies 2

As covered in the previous setup, one of the ways to trade the cup and handle pattern is to enter just before the price breaks out of pattern.

However, sometimes the breakout might be too fast, or you might have missed the breakout opportunity.

After such a long build-up (the cup and also the handle), it is very likely that any resulting move up would have more than 1 leg, so the first pullback/pause is a good place to enter because there is a high chance of a 2nd leg after the trend resumes.

In the example above, we see prices surge after the initial breakout, followed by a small pause which looks like a bull flag, before prices continue to surge again after breaking out from the flag pattern.

That small pause (in this case the bull flag) gives us a good low risk opportunity to get into the trade to ride the next wave of uptrend. Do note that the pause may not always be a flag, sometimes it might take other forms, but the idea is the same.

For trading, we would look to enter during the pause (formation of the small flag), when the risk and volatility is low.  The bottom of the pullback pattern would be a good place to put your stoploss.

If you have already taken a position using Strategy #1 on the pre-breakout, you can also use Strategy #2 to add more positions on the first pullback.

 

Profit Target for the Cup and Handle Pattern

Once the cup and handle pattern is identified, you can use the completed pattern to do a price projection, which can serve as a good estimate for a target profit for your trade.

To measure the target price, take the maximum height of the cup, and project that distance from the breakout point.

Profit Target for the Cup and Handle Pattern

In the chart above, the maximum height of the cup is indicated by the blue rectangular box, which is then used as a price projection at the breakout point.

The black horizontal arrow indicates the price level which serves as the minimum profit target for the cup and handle pattern breakout.

To get an added layer of confirmation, you can look for confluence with with tools and methods, such as support and resistance levels.

 

Tips from the Trading Desk

  1. For cup and handle continuation, look to trade with the trend, especially if the trend is strong.
  2. For cup and handle reversal, look for a strong accumulation base to build the move.
  3. Look for multiple attempts to break the resistance, but also avoid the false breakouts!

Tips from the Trading Desk

As you can see from the chart above, a key component of the cup and handle pattern lies in the resistance level, because in a sense the whole build-up during the cup and the battle during the handle is an attempt to break though this level.

Hence during the build-up phase, we should look out for attempts to break the resistance levels, and it is expected that the first few attempts will fail, so do not try to trade those breakouts.

These “false breakout” attempts are more to probe for weaknesses, and the chances of a successful breakout at this point of time is low because there is insufficient build-up, which usually takes the form of the handle.

Hence, it is more prudent to only enter this setup during the handle formation, especially if previous attempts have been made to break the resistance.

Now that I have shared the various trading strategies for the cup and handle price pattern, which is your favourite strategy?

Let me know in the comments below.

 

thumbnail the definitive guide to trading price chart patterns

If you would like to learn all the different price chart patterns, also check out: “The Definitive Guide to Trading Price Chart Patterns”

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