What is the Cup and Handle Pattern and How Do You Trade It?

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Trading inverted cup and handle patterns

Typically, cup and handle patterns fall between seven weeks to over a year. 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 placed either below the handle or below the cup depending on the trader’s risk tolerance and market volatility. The reverse cup and handle pattern is a bearish chart formation that suggests a price reversal. It features a rounded top, resembling an upside-down cup, followed by a slight rally forming the handle.

Cup and Handle Pattern Stock Market Example

The problem with the setup is that everyone uses the same approach when determining entry and exit for the formation. Now that we have covered a short introduction to the cup and handle pattern, let’s walk through a few day trading strategies that can separate you from the crowd. Consider using one of the best trading simulators to teach yourself how to trade inverted cup and handle patterns without risk. 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. Whatever the height of the cup is, add it to the breakout point of the handle. For example, if the cup forms between $100 and $99 and the breakout point is $100, the target is $101.

The cup and handle pattern’s fourth trading step is to put a stop-loss order at the handle’s swing low point. Place a stop-limit order or a stop-market order at this level to manage risk. The second cup and handle trading step is to enter a buy trade after the price breaks out from the pattern on increasing buyer volume.

This signifies that the traders are losing interest in selling, and the Cup and Handle Pattern is going to continue its bullish trend. The cup and handle pattern gets its name from the distinct shape – a rounded bottom cup followed by a smaller handle formation. When prices break out above the handle’s resistance, the pattern is considered complete, signaling a potential bull run. A detailed analysis of ABC Ltd.’s stock price on the National Stock Exchange (NSE) has revealed a classic Cup and Handle pattern.

What Are The Key Facts Of a Cup and Handle Pattern?

1. As the cup is completed, a trading range develops on the right-hand side, and the handle is formed.
2. The peak of the right side of the cup occurred just above the key psychological level of $25, which was followed by a decline to $24 (the handle).
3. The reverse cup and handle pattern, also known as the inverted cup and handle, is the bearish counterpart to the traditional cup and handle pattern.
4. Place stop orders below the 61.8% retracement level and set a price target at the previous high.
5. In my experience, it’s also one of the more reliable chart patterns, as it takes quite some time for the formation to setup.

In this example, the stock RHI had a nice bottom that formed into a deep cup. The important item to note is that the right side of the cup cut through the Ichimoku cloud and even made an attempt at trying to move beyond the cloud itself. Nevertheless, notice how once the handle completed and the stock sky rocketed off, the area around the cloud acted as support prior to the move up. As you can see from the above example, the cup is really a rounding of price action near a series of lows. One of the key characteristics is volume will be heavy on the left, light in the middle and pick up again on the right side of the cup. When you layer the volume on top of the price action, they both can look like two Us on the chart.

The cup and handle is one of the easiest chart patterns to identify, because we all can recognize a cup. Some of us may not be rocket scientists; however, everyone I know has used a cup in their lifetime. While inverted cup and handle patterns send a down-trending sell signal, cup with handle patterns send an up-trending buy signal.

Like the normal variety, Intraday Cup and Handle remain a bullish continuation signal pointing to a potential upside. Wider context and additional confirmation are prudent when factoring these brief formations into trading decisions. The resistance level is the price level at which the stock price was not able to break during the previous high. It is a strong indication that the bullish trend will continue when the stock breaks through the resistance level.

Sometimes, the right side of the cup and handle pattern reaches above the previous high or falls slightly short of the high. The key component is that the price rallied back close to the previous high formed by the left side of the cup. This is followed by an increase in trading volume as the stock price recovers to its peak. A longer formation period establishes a solid base for a potential breakout. Moving averages are a valuable tool for confirming the Cup and Handle pattern.

Resistance, when broken, turns into new support for prices, and that is what happened to silver. In December 2023, silver prices reached a high of $25.893 before falling to the January 2024 low of $21.904, shaping the left side of the cup. The left side of the cup retraced slightly more than 61.8% of the previous uptrend. During the breakout, a significant increase in volume indicates strong buying interest and validates the breakout’s strength.

To improve the odds of the pattern resulting in an actual reversal, look for the downside price waves to get smaller heading into the cup and handle. The smaller down waves heading into the cup and handle cup and handle pattern target provide evidence that selling is tapering off, which improves the odds of an upside move if the price breaks above the handle. FXOpen’s advanced TickTrader platform allows users to identify the inverted cup and handle formation in real-time across hundreds of markets.

The cup and handle pattern occurs when the price of an asset trends downward, followed by a stabilizing period. It creates a U-shape or the “cup” in the “cup and handle.” The price then moves sideways or drifts downward within a small price range, forming the handle. When the price breaks below the handle, it signals traders to exit long positions or enter a short position. A stop-loss order is then placed above the handle and a profit target is calculated by the height of the cup subtracted from the handle breakout point.

1. The prolonged formation often strengthens its predictive potential, as it suggests an accumulation phase where price levels consolidate gradually over a long period.
2. This breakout is often accompanied by increased volume, signaling strong buying interest.
3. Futures and options trading has large potential rewards, but also large potential risk.
4. In summary, volume analysis is essential when trading the Cup and Handle pattern.
5. There are several ways to approach trading the cup and handle, but the most basic is to look for entering a long position.
6. This example is best for medium term and longer term position traders seeking to trade a cup and handle.
7. The former resistance became new support and a launchpad for the NDQ to jump higher.

The pattern’s formation may be as short as seven weeks or as long as 65 weeks. The reasoning behind this explanation is that the breakout move requires strong volume after the necessary quiet period to form both the cup and the handle. You can’t find a more quite time to trade the markets than late afternoon when everyone is off at lunch or have finished trading for the day.