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 are 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.
There are two parts to this chart pattern:
- The cup
- The handle
The cup forms after a downtrend are followed by an uptrend and look like a bowl or rounding bottom.
As the cup is completed, the price trades sideways, and a trading range is established on the right-hand side, and the handle is formed.
A breakout from the handle’s trading range signals a continuation of the previous uptrend.
How to Trade the Cup and Handle Chart Pattern
The cup should resemble a bowl or rounding bottom.
The perfect pattern would have equal highs on both sides of the cup, but in the real world, perfect doesn’t exist.
After the high forms on the right side of the cup, a pullback forms the handle.
The handle is the consolidation before the breakout.
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.
The buy point occurs when the asset breaks out or moves upward through the old resistance issue (right side of the cup).
This breakout should occur with increased volume.
The price target following the breakout can be estimated by measuring the distance from the right top to the bottom of the cup and adding that number to the buy point.
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 advances 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 set below the handle or the cup, depending on the trader's risk tolerance and market volatility.