Cup and Handle Pattern

The cup and handle pattern is a form of technical analysis indicator that arises when the price chart of an asset resembles a U-shape with a horizontal line that normally drifts downward, similar to a teacup. It is a bullish continuation pattern, which implies that once the pattern is completed, the price will normally rise. 

For successful trades with the cup and handle chart pattern, one must correctly identify the pattern, purchase the asset at the logical entry point, establish a stop-loss for risk management, and determine a price goal for exiting a profitable trade.

What is the Cup and Handle Trading Pattern?

Cup and Handle Pattern is a bullish continuation pattern that signals a strengthening of a security's price followed by a breakout, after which the scrip's price soars up. The U-shaped cup represents the era of consolidation, while the handle represents the moment of breakout.

An American technical analyst is credited with popularising cup and handling chart patterns.

In the late 1980s, William J. O'Neil published How to Make Money in Stocks. In a few places, O'Neil presented an in-depth investigation and identification of the cup and handle. He said that cup and handle chart patterns can last anywhere from 7 to 65 weeks (most are three to six months). The typical percentage correction from the absolute peak to the price pattern's low point ranges from 12% to 15% to 33%.

Indication of the Cup and Handle Stock Pattern

As the stocks in this pattern test old highs, they are likely to face pressure from investors who have previously purchased at this level. It will most likely consolidate into a decline for 4 to 4 weeks before rising due to selling pressure. It is a sort of bullish continuation pattern that is used to spot purchasing opportunities.

How to Trade the Cup and Handle Chart Pattern

As a trader amny traders want to learn how trading with the Cup and Handle Chart Pattern is done. One must identify and comprehend the following critical points:

  • The cup should form a U shape rather than a crisp V pattern. A rounded U shape indicates a gradual upward tendency from the lowest levels.
  • The handle appears as a breakout from the cup's edge, advances lower, and eventually breaks into a price that breaks the resistance. Its handle price falls below the resistance and cup levels. The handle develops through time rather than in a single leap.
  • Only when the upward advance from the handle is accompanied by significant volumes is it considered a continuing bullish trend.
  • Past Trend: Such a pattern should appear after a few months of continuous upward trending, not after a break-jerk. If the pattern appears after an extended upward trend, it may be a weak pattern with little upward potential.
  • The cup depth is normally up to a third of the edge price, but in particularly volatile conditions, and it can go as deep as 12 deep from the edge price. 
  • The cup normally forms over a period of one to six months or one year and is not an overnight trend or pattern; similarly, the handle forms over a period of one to two weeks. A gradual formation indicates a consistent trend. 
  • A trader can identify a breakout by observing the precise volume spike that occurs after the cup and handle emerge. Traders can also follow the resistance line; if the stock crosses the resistance price after the breakout, it is a good time to begin a long position. Traders might keep the handle at the bottom to limit losses and profit from upswings.

    For bigger returns, experienced traders with a higher risk appetite position their stop loss near the bottom of the cup as well.
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