Cup And Handle Pattern: What Is It & How to Trade It

The cup and handle pattern is a bullish continuation pattern that consists of two parts, the cup and the handle. The cup typically takes shape as a pull back and subsequent rise, with the candlesticks in the center of the cup giving it the form of a rounded bottom. The handle is made up of downward-sloping price action that soon breaks out above the upper resistance line to indicate the continuation of the original bullish trend.

• The best cup and handle patterns have a shallow retracement on the handle (not more than 1/3 of the cup).
• For example, if a cup forms between $99 and $100, the handle should form between $100 and $99.50, ideally between $100 and $99.65.
• For example, if the price of a product ranges from $100 to $200, ideally, the handle (high-to-low) should range between $200 and $150.
• This formation comes from how some traders use momentum strategies to trade patterns and trends seen on the chart.
• The pattern’s formation may be as short as seven weeks or as long as 65 weeks.

In contrast with a traditional cup and handle pattern, an inverted cup and handle is an indication of a bearish movement. Handles are usually triangular in shape or have lateral descending channels. The best time to buy and make an entry is when the price crosses the top of these channels. This is because when the price crosses the handle, pattern formation gets complete, and the price of the underlying asset will rise. Every candlestick chart represents a movement in the price of a security.

Cup and Handle

That can maximize the likelihood of predicting a breakout while potentially minimizing risk. The entry point for a cup and handle pattern is to buy when the price moves above the handle formation. This is made simpler by using a drawing tool and waiting for the price to move up and out of the drawn handle pattern. A stop-loss can be placed below the low price point in the handle. The trend is your friend is a common proverb used by many experienced traders, highlighting the importance of market momentum. As the inverted cup and handle is an example of trend continuation, it can be coupled with trend indicators.

The handle will typically form a descending trendline … Take a look at the chart below for an example. One of its limitations is the ambiguity of the pattern formation. In most cases, the decline from the high to the what does a cup and handle chart mean low of the handle shouldn’t exceed 8%–12%. If it does, it shouldn’t exceed the previous drop within the cup. The material provided is for information purposes only and should not be considered as investment advice.

What is the Inverse Cup and Handle Chart Pattern?

After they exit, the stock can consolidate to form the base until it runs again. This happens when traders and investors stop selling shares and shift back into buying mode. After the initial stock runup of the pattern, the price drops as investors sell their shares. Yep, this is a bullish pattern and can be a technical indicator for traders of a potential upcoming breakout. Below is an example of an inverted cup and handle on the FTSE 100 weekly chart. Although the pattern formed and the price did decline, ultimately, the price did not follow through to the downside.

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What are the benefits of trading cup and handles?

2009 is committed to honest, unbiased investing education to help you become an independent investor. We develop high-quality free & premium stock market training courses & have published multiple books. We also thoroughly test and recommend the best investment research software. If the price reverses and declines after the pattern is confirmed, it is considered bearish, and the pattern has failed. U.S. Treasuries (“T-Bill”) investing services on the Public Platform are offered by Jiko Securities, Inc. (“JSI”), a registered broker-dealer and member of FINRA & SIPC. See JSI’s FINRA BrokerCheck and Form CRS for further information.

A cup and handle breakout occurs when the value of the stock breaks out from a cup shape. It should not be confused with a breakout trade during a down-trending market. In other words, if there was no uptrend in the first place, you cannot have any down breakouts since there is no pressure on prices. The first step to finding stocks that have profitable chart patterns is to select a set of criteria. Finviz offers a range of pre-defined filters and sorting options, enabling traders to quickly narrow their search by sector, industry, market capitalization, and more. After selecting the desired criteria, traders can apply the filter to the Finviz screener.

How to Use Stochastic to Identify Overbought and Oversold Markets

The handle can develop over one week to several months on a daily chart, although ideally completes in less than one month. A good entry would be when the price breaks above the top of the descending trendline. If you’re going to use this pattern in your trading strategy, you’ll have to accept the discrepancies. The handle isn’t as pronounced as the first two, but it’s there.

Together with additional indicators, the cup and handle chart pattern can be a valuable tool in determining how to invest in stocks. However, it also has a bearish, inverse cup and handle pattern, which is a typical bearish continuation pattern best known for the inverted cup and an upward-sloping handle. Like any other bullish pattern, even a cup and handle formation can experience a false breakout.

What Does the Cup and Handle Candlestick Pattern Tell You?

It provides traders with the ideal entry points in the market that help them place successful buy orders. It consists of a cloud range that tells trades where the asset prices are potentially going to head in the future during the uptrend. When the Cup and Handle pattern’s Handle breaks above this cloud, it confirms the strong uptrend and provides traders with an entry signal. The Intraday Cup and Handle pattern is a short term pattern that can be located on a 60-minutes chart and help traders long for a trade opportunity in a continuous trend. It looks almost the same as a regular Cup and Handle with only one difference – since it appears on an hourly chart, the price fluctuations are higher but close to each other.

That’s the idea behind charting, which has long been popular among professional traders and investors. You may have seen charts in the financial news, on TV, or in print, and might even have heard terms like a cup and handle or head and shoulders. Additionally, trading cup and handle patterns require patience, as they typically take weeks or months to form. Similarly, a breakdown from the cup can be used as a signal to enter a short position.

Strategy #2 – Stochastic Divergence

The pattern’s formation usually signals an impending rise in the stock price. To set a price target for a cup and handle trade, traders can measure the depth of the cup from its high point to its low point. For example, if the cup has a depth of $10, then the price target should be set at $10 above the breakout level. This will provide a high probability exit point with a healthy potential for profit. Additionally, traders can use a trailing stop loss to protect their profits if the stock reverses direction due to outside influences. A cup and handle is a technical analysis pattern that appears on a chart as a U-shaped pattern, followed by a small downward drift, resembling a handle.