What Is a Cup and Handle Chart Pattern?

A Cup and Handle is a price pattern that investors use to help identify uptrending stocks that are in a temporary holding pattern. This price pattern is a bullish continuation pattern, which means it can be found in uptrending stocks and indicates that the previous uptrend may continue if the price breaks out of the pattern. Confirmation of this pattern is usually given by the relationship between price and trading volume.

What Is a Cup and Handle Pattern?

The graphic figure Cup and Handle is a trend continuation figure. It comes after an uptrend and confirms this same movement. It has this name because of the visual pattern very much like a cup and its handle, the latter, always to the right of the cup.

Simply put, after a large bullish flow the chart has a temporary trend reversal momentum of 30-50% of the length of the previous bullish trend, added to a small lateralized stretch of the price. Then there is a return to the point where the price began to reverse, with a possible variation of 10%. At this time, the Cup formation is complete. After that, there is a new momentum of decreasing temporary reversal, this time smaller and almost lateralized, with a decreasing sequence of volume, forming the Handle.

Confirmation of this pattern comes with a considerable increase in volume and, finally, confirmation of the uptrend in higher prices than the one preceding the pattern.

The Cup and Handle pattern can be easily confused with other patterns. In the case of the double bottom the difference is that the double bottom comes after a downtrend, and characterizes the end of it. In addition, it has a V-pattern in the background, different from the characteristic Cup and Handle U-pattern and guaranteed through the period (even if short) of price lateralization.

Another graphic figure that can be mistaken is the bear trap. The bear trap also has a V bottom and is a momentary pattern break, represented by a candle with a large lower wick.

Types of Patterns and How to Identify Them

In Graphical Analysis there are some variations of this graphic figure. In addition to the common Cup and Handle that is most often mentioned in study books, there is also the inverted, high handle, and intraday pattern. Intrinsically, all respect the main characteristics of the Cup and Handle formation.

Different Handles

The Handle pattern is usually presented in a descending tunnel format. However, the pattern can also be observed in a triangle pointing downwards and even a triangle pointing upwards or ascending tunnel. These patterns are a little rarer, so you need to pay attention to the behavior of the volume to confirm the presence of the graphic figure.

Cup and High Handle

Cup and High Handle is usually seen in markets with a lot of trades and very heated by investor optimism. Unlike the common pattern, this “High” pattern leaves the Handle slightly above the previous high where the Cup started but remains within 10% of the Cup edge. The result of the pattern remains the same, with a downturn in the bearish pattern with decreasing volume, a side trade followed by a rise in increasing volume following the pattern.

Intraday Cup and Handle

The presence of this pattern in intraday charts is not as common and may not be as strong as in daily charts. Since the discovery of the cup and handle pattern there has been an improvement of the software bringing an ease of finding this pattern within the trades, as in a 4-hour chart for example. Typically, when this pattern is confirmed on an intraday chart and/or over a different chart time along with the volume that always accompanies it, you may be looking at a great investment opportunity.

Inverted Cup and Handle Pattern

The Inverted Cup and Handle is a pattern that indicates the end of a trend and the beginning of its reversal. In this case it will be a call signal since the Cup and Handle indicates a pattern of high prices.

Imagine that you have been surfing a bullish wave for a long time and along with you other investors and institutions are also doing the same. There comes a certain point where all these players tend to make a profit from selling at maximum prices. When this mass sale happens, soon comes the reversal of this trend, and the inverted Cup and Handle may be at the top of this chart indicating the reversal and the bearish continuation pattern. The volume plays an important role confirming the appearance of this graphic figure.

To identify an Inverted Cup Handle the trend line should make a curvature at the top of the chart showing exactly the image of an upside down cup.

How To Trade Using the Cup and Handle Pattern

Enter Cup and Handle

When this pattern occurs, usually its handle has a triangular or tunnel shape. The ideal way to operate this economic moment is after the movement breaks the top formed by this Handle. That is, after the confirmation of the uptrend that follows the Cup and Handle. The volume indicator will confirm the upward movement along the price action. The moment is ideal for the purchase of the asset waiting for its appreciation.

Set a Stop Loss

Always remember to protect yourself. Stop loss is a protective strategy if the market does not respect the pattern, or if it is not so strong. If the chart is against your analysis, even after you have correctly identified the Cup and Handle pattern, smartly add your stop loss: your stop must be below the lowest point of the Handle. After the movement of the candles starts to go in favor of your strategy, it is possible to protect yourself even more, bringing your stop loss close to your entry value and thus, increasingly, zero your risk. This strategy is called Break Even.

Pick a Target or Exit

To define your target, or exit from the operation, you must project a Take Profit above the input with margin based on the last tops achieved in the chart. If there is no recent top looking at the chart’s past, try doubling the size of the cup depth from the bottom of the handle. This will create a target based on previous price behavior and momentum. There are many other ways to define a target or output as Fibonacci specific points, replicating previous chart channels or using your expertise along trading volumes.

Limitations of the Cup and Handle Pattern

Like any strategy based on graphic patterns there are times when it will fail. In the futures market, no day is the same. When this pattern is found on a bullish chart it is more likely to work, but the previous bullish one may not have created enough momentum to sustain the trend or create a higher high. Also, take into account that the trend remains until there are no signs of reversal of values.

Conclusion

The Cup and Handle graphic is an uptrend confirming figure. It usually appears in daily charts, but can also appear in other time windows. Volume is one of the main indicators of confirmation of this graphic figure. Although we have said that the pattern resembles a cup and its handle, it may not be well visible or not very well defined. This can confuse beginners and lead to incorrect analysis. It is possible to achieve excellent profits with strategic inputs after this pattern, but it takes familiarity to trade using this pattern and extensive knowledge in graphical and market analysis.