Cup Handle Formation

pattern is complete

When you identify a and handle pattern on smaller time frames e.g. 15-minute, zoom out to see the larger trend in higher time frames e.g. daily. The Cup and Handle pattern is where the price initially declines, then levels off and begins to rise again, thus resembling a cup with a handle. Thomas Bulkowski’s backtests are also lacking strict buy and sell rules, and he argues the cup and handle strategy is inferior to many other patterns. In this article, we backtest the cup and handle pattern strategy.


  • The smaller down waves heading into the cup and handle provide evidence that selling is tapering off, which improves the odds of an upside move if the price breaks above the handle.
  • It is a bullish continuation pattern which means that it is usually indicative of an increase in price once the pattern is complete.
  • Handles are usually triangular in shape or have lateral descending channels.
  • A rounding bottom is a chart pattern used in technical analysis that is identified by a series of price movements that graphically form the shape of a „U.“
  • After the high forms on the right side of the cup, there is a pullback that forms the handle.

This is made simpler by using a drawing tool and waiting for the price to move up and out of the drawn handle pattern. A stop-loss can be placed below the low price point in the handle. Yes, this pattern is a signal of bullish market sentiments, which means that prices will move upward upon completion of this pattern. This information has been prepared by IG, a trading name of IG Markets Limited.

Cup and Handle Patterns Simplified

The cup can be spread out from 1 to 6 months, occasionally longer. The perfect pattern would have equal highs on both sides of the cup, but this is not always the case. If you’re day trading, and the target is not reached by the end of the day, close the position before the market closes for the day. 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.

Estimating the extent of the continuation movement by measuring the distance between the base of the cup and the breakout slightly underestimated the movement. The pattern forms during as a result of consolidation a bullish movement and indicates a continuation of that bullish trend after its completion. Another related technical analysis indicator to keep in mind is an inverted cup and handle pattern. Some traders consider that pattern a harbinger of a downtrend in the asset’s price that helps identifying selling opportunities.

period of consolidation

This will only lead to a search for a needle in a haystack, which is a waste of time. According to William O’Neil, who introduced the world to this concept, the percentage of correction in the cup and handle pattern from its peak to its lowest point ranges from 12% to 33%. You can use a simple formula for identifying the most appropriate exit target irrespective of the cup’s height. This involves summing up the height of the cup with a breakout point.

What is the Target for Cup and Handle Pattern?

What should you do if volume on breakout day is much lighter than usual? Light volume in the market in general may also be a factor. Also consider that the breakout may have started later in the day. The stock needs to show a 30% uptrend from any price point, but it must be before the base’s construction. Or, the stock must show a minimum 20% increase from a prior breakout. The buy point occurs when the stock breaks out or moves upward through the old point of resistance .

upside down cup

Technical traders using this indicator should place a stop buy order slightly above the upper trendline of the handle part of the pattern. A cup and handle is considered a bullish signal extending an uptrend, and it is used to spot opportunities to go long. The Opening range Breakdown One of my favorite day trading setups is an opening range breakdown on a morning gap.

On the charts it looks like an upside down cup with the price of an asset on a downward trajectory moving up, stabilizing and then moving down again, followed by a handle pointing upwards. Most of the same general rules, such as the handle not exceeding 1/3rd of the cup, still apply. The price of the asset is expected to drop after the pattern formation is complete. If the trend is up and the cup and handle form in the middle of that trend, the buy signal has the added benefit of the overall trend. In this case, look for a strong trend heading into the cup and handle. For additional confirmation, look for the bottom of the cup to align with a longer-term support level, such as a rising ​trendline or moving average.

Plan your trading

The handle alone needs at least five days to form, but it could go on for weeks. Make sure it doesn’t exceed the cup portion in time or size of decline. A good cup with handle should truly look like the silhouette of a nicely formed tea cup.

cup and handle

Once a cup and handle pattern forms, in order to generate a bullish trade signal, the price must break above the top of the handle that has formed. The theory behind the cup and handle pattern is that if the price tried to drop but then rebounded, there must be strong buying momentum behind the asset to continue moving higher. This could attract traders to open a position at the price rise, or at least avoid opening a short position against it.

Being a pattern, the inverted cup and handle pattern signals the continuation of the downtrend. Cup and handle patterns form as the result of consolidation after an uptrending stock tests its previous highs. At that level, traders who bought the stock near the previous highs are likely to sell, causing a gentle pullback.

The plot is a magenta/blue histogram of a proprietary triple smoothed overbought-oversold oscillator. When the bars are blue and above the centerline, the trend is up. Magenta bars above the centerline indicate a pullback in an uptrend. When the bars are magenta and below the centerline, the trend is down.

By having the handle and stop-loss in the upper third 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.

What Is the Cup and Handle Pattern?

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Those that like them see the V-bottom as a sharp reversal of the downtrend, which shows buyers stepped in aggressively on the right side of the pattern. A conservative price target can be achieved by measuring the height of the handle and adding it above the resistance level at the top right-side of the cup. While the price is expected to rise after a cup and handle pattern, there is no guarantee.

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. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

Each stage of the formation and completion of these patterns represents a buying or selling opportunity. Knowing how to read and interpret charts is one of the most important aspects of trading. We explore the cup and handle pattern, as well as the inverted cup and handle, and show you how to trade when you recognise these patterns. Secondly, practitioners have found issues with the depth of the cup. While a shallower cup can represent a bullish signal, a deeper cup can produce a bearish signal.

Handles are usually triangular in shape or have lateral descending channels. The best time to buy and make an entry is when the price crosses the top of these channels. This is because when the price crosses the handle, pattern formation gets complete, and the price of the underlying asset will rise. The handle is nothing but a consolidation before the breakout.

But, ultimately, if the price breaks above the handle, it signals an upside move. For example, if a cup forms between $99 and $100, the handle should form between $100 and $99.50, ideally between $100 and $99.65. If the handle dives too deep and erases most of the gains of the cup, you should avoid trading the pattern. A double bottom pattern is a technical analysis charting pattern that characterizes a major change in a market trend, from down to up. 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.

How to Trade the Cup and Handle Pattern?

Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

The chart above is a daily gold chart in which we have drawn the „cup and handle“. I hope this answers the question posed by one of our readers. One of the comments from yesterday’s „After Hours“ article was a question about the identification and validity of a pattern. I felt that the reader was correct in identifying this pattern and warranted an explanation of how to incorporate this pattern into the current price action in gold.

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