Cup and Handle Pattern Trading Strategy Guide

The inverted cup and handle chart pattern features in the trading arsenal of many technical traders. The pattern may be hard to identify at first; however, it’ll become easier to find after you trade it a few times. Market participants should not take it as a holy grail indicator, as the profitability of each strategy can vary heavily according to market conditions. Trading psychology can also greatly affect your overall gains.

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After this upswing, there is typically a period of consolidation or sideways movement which forms the “handle” of the pattern. This handle should be relatively short-lived and is then followed by a breakout that signals potential buying opportunities. A price forms this pattern as a retest of the previous high, causing selling pressure from traders who bought an asset near it. However, the decline doesn’t happen as a straight dump but looks more like a „flag“, meaning buyers remain interested in the asset despite its high value.

What is a ‘cup and handle’?

Less of a price drop from the high is a signal of strength and shows more potential of an upcoming uptrend. The heavy support level can potentially improve the odds of the price moving higher after a breakout. Remember, patterns won’t look perfect all the time, and it’s unrealistic to expect them to do so.

Here’s what you need to know about this pattern and how it can help you maximize your profits when the next run comes. The standard cup and handle pattern is a bullish signal, but there is also a bearish version of this pattern what does a cup and handle chart mean called “Inverse Cup and Handle” pattern. However, note that cup and handle pattern failure may occur more frequently in overall bearish markets. Always use stops to minimize risk in case of a failed cup and handle pattern.

What is the Best Way to Find a Cup and Handle Formation?

The bullish cup and handle formation often signals that a bear market has ended and prices are set to resume their upward momentum. Traders who know how to recognize this pattern may be able to identify entry points in advance and maximize their profit potential during these periods of prolonged uptrends. The Inverted Cup and Handle pattern is the exact opposite of the Cup and Handle Pattern as it indicates a bearish reversal pattern. It provides traders with ideal sell/exit signals and also enables them to short trades during the downtrend. Being the opposite of a regular Cup and Handle Pattern, it first makes an ’n‘ shape (Cup), followed by an upward linear shape (Handle). In this pattern, asset prices first witness a steep fall during a continued downtrend, followed by a sudden but not so steep increase in the prices.

• Cup and handle technical analysis is relatively simple to spot and makes it easy to know when to buy or sell your cryptocurrency holdings.
• Yet, in most cases, the chart formation might show a sharp “V” and a somewhat downward-sloping handle that is either a pennant or even a wedge.
• Like all technical indicators, the cup and handle should be used in concert with other signals and indicators before making a trading decision.
• Now 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.
• The pattern starts to form when there is a sharp downward price movement over a short time.
• There are several ways to approach trading the cup and handle, but the most basic is to look for entering a long position.

“Your stop loss should be placed at a level where if the market reaches it, your trading setup is invalidated”. But, if you noticed that the price is holding up nicely at Resistance, then it’s a sign of strength as it tells you buyers are willing to buy at these higher prices. After the Cup is formed, the market has shown signs of bottoming as it makes higher lows towards Resistance. The handle should not drop into the lower half of the cup, and ideally, it should stay in the upper third. The perfect pattern would have equal highs on both sides of the cup, but in the real world, just like when finding someone to marry, perfect doesn’t exist. Ask a question about your financial situation providing as much detail as possible.

Identify hidden opportunities, master risk management,

You can put your stop loss  below the bottom point of the respective handle pattern. However, in case price is showing vulnerability and has moved up and down in recent times, you can place the stop-loss target below the lowest point of the most recent swing. Even though the price is rising, there is no guarantee that it will continue doing so.

• The handle can be either a small, unorganized pullback, or a bear flag or pennant.
• In that case, the exchange automatically closes your trade, and all losses will be limited to around 10%.
• Specifically, with the cup and handle, certain limitations have been identified by practitioners.
• The take profit is the next support or the distance equal to the length between the cup’s peak and the support level.
• Although it’s one of the more popular chart patterns, it also has limitations.
• Once you spot a chart with a Cup With Handle pattern, it’s best to wait for price to break out of the handle before entering a long position.
• The chart above shows that the height/depth of the cup and handle is equal to the price target.

By having the handle and stop-loss in the upper third (or upper half) of the cup, the stop-loss stays closer to the entry point, which helps improve the risk-reward ratio of the trade. The stop-loss represents the risk portion of the trade, while the target represents the reward portion. Since the handle must occur within the upper half of the cup, a properly placed stop-loss should not end up in the lower half of the cup formation. The stop-loss should be above $49.75 because that is the halfway point of the cup. This pattern can occur both in small time frames, like a one-minute chart, as well as in larger time frames, like daily, weekly, and monthly charts. As you can see in the chart above, after the price broke below the neckline of the inverse cup pattern, the GBP/USD fell sharply.

How to trade when you see the cup and handle pattern

Register for a live account now or practise first with virtual funds on our demo account to familiarise yourself with the platform. FXOpen is a global forex and CFD broker, with a network of worldwide brokerages regulated by the FCA, CySEC and ASIC. FXOpen offers ECN, STP, Micro and Crypto trading accounts (dependent on entity). This article represents the opinion of the Companies operating under the FXOpen brand only. One of the biggest drawbacks of this pattern is that it may take a lot of time to form.

However, while this pattern is straightforward, you should be careful when entering a trade and use other tools to confirm the breakout. Take note that the Inverse Cup and Handle is the opposite version of the Cup and Handle pattern, which appears during a downtrend and is a bullish chart pattern. Both of them are among the most popular and widely used classical chart patterns. The pattern is considered valid when the price closes below the neckline support level (the top of the cup).

The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. The cup-and-handle pattern is just one of these and should not be used in isolation. Volume confirmation is key when trying to identify a stock that is ready to break out. The cup-and-handle pattern doesn’t indicate how long a price rise will last. Many traders look for volume confirmation to signal that a buy is warranted.

It is an ideal signal for buyers who are waiting to enter the trade. However, like other candlestick patterns, this may also give misleading signals in some cases. It is imperative that you refer to other indicators as well before taking any investment or trading decision. The cup and handle chart pattern is considered a bullish signal, as it indicates that the price of an asset is likely to continue rising. The pattern is created when the price of an asset forms a cup shape, followed by a brief dip (the handle).

How can you trade stocks that have formed a Cup With Handle pattern?

The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. It was developed by William O’Neil and introduced in his 1988 book, How to Make Money in Stocks. You’ve identified a cup and handle pattern, but before you jump into the trade, you must wait for a handle to form completely. The handle often takes the form of a sideways or descending channel or a triangle pattern. When the price breaks out of the handle, the pattern is considered complete, and the price is expected to rise. HowToTrade.com takes no responsibility for loss incurred as a result of the content provided inside our Trading Room.