Cup and Handle Patterns

How to Trade Cup and Handle Pattern

Cup and handle patterns are bullish patterns that look like the name they are called. Price moves to a peak level and starts to pull back or fall rapidly. Once the price has found a base, several candlesticks form the rounded cup bottom. Then, the price goes back up to the 1st peak level. At this point, the price fails to break resistance and retraces down the side of the cup, thus forming the handle. Look for a breakout at the top of the cup.

A cup and handle pattern consists of several candlesticks that form a u formation, which makes up the base of the cup. Then, near the top of the cup, the price is rejected and creates a falling wedge or falling channel. This is what forms the handle portion of the cup and handles. They are considered to be bullish continuation patterns. The cup and handle pattern gets its name because it looks exactly like that.

C&H patterns are common when stock trading. The cup is shaped like a U, and the handle trades to the right side. The handle can either tilt down or go sideways. The cup and handle is a bullish pattern. However, they’re formed during a consolidation period.

The cup is formed during the consolidation. The handle forms on a pullback. If the handle breaks, the stock will move up. However, it’s important to remember that patterns also break down. The handle may not break out. Sometimes, the handle forms and then fails.

Other times, the handle forms, and then it takes a while for the breakout to get going. Look at the candlesticks forming the handle. Are they hammer candlesticks, dragonfly doji candlesticks, or high-wave candlesticks?

Candlesticks forming the handle will warn you about what will happen. If the handle breakout fails, there were probably candlestick warnings along the way.

5 Second Take Away

  • It is a bullish continuation pattern that resembles a cup with a handle.
  • The pattern starts with a rounded bottom (the cup) that resembles a “U” shape.
  • After the cup forms, there may be a slight downward price consolidation, creating a smaller price pattern known as the handle. 
  • Once the handle is formed, the stock price usually breaks out above the resistance level formed by the top of the cup.
  • Enter the trade when the price breaks above the resistance level formed by the top of the cup.
  • Place your stop-loss below the lowest point of the cup or handle.
Cup and Handle Bullish Pattern

U Shape

These patterns are a U shape. You want to avoid a sharp V shape because this then changes the pattern. As a result, the cup should resemble a bowl or a rounding bottom

It would be considered too sharp for a reversal if it formed a V. The softer the U shape of the cup, the more it ensures the cup is the consolidation pattern.

The cup also doubles as a key support level. A perfect cup would be even on either side. The highs would be the same. However, as we’ve learned, perfection rarely happens in patterns.

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The Handle

The handle of the cup and handle patterns form on the right side. Pullbacks form handles. Sometimes, the handle can form down, making a flag, pennant, or wedge pattern.

Other times, it trades sideways in a range. The handle is the final pullback before the big breakout. In fact, the smaller the handle, the more bullish the C&H pattern is.

The more bullish it is, the bigger the breakout. The handle is resistance. It’s important for a break above the resistance line. As you can see in the chart above, it took a while to break resistance.

That could be a problem if you’re trading options. Options expire, and you’ll lose that investment if you don’t give yourself enough time. That’s why getting confirmation is a good thing.

Don’t think of missing the first move-up as a bad thing. That can be the difference between profit and loss. Especially if the pattern breaks down or the bulls are trapped.

Cup and Handle Trading Strategy

  • Watch for u bottom consolidation to form a cup pattern
  • Watch for the price to reject the top of the cup and form handle formation
  • Next, look for price to break out of the handle area
  • Then, watch if Price can break the top of the cup and hold
  • Traders take a long position once the top of the cup breaks and holds
  • Place stop below the base of the handle
  • Some traders take a long position once the price breaks out of the handle

1. Cup and Handle Pattern Entry

Your entry point is typically when the price breaks out above the resistance level formed by the top of the cup, indicating potential upward momentum. On the other hand, some traders may choose to wait for a conclusive breakout with increased trading volume to confirm the pattern’s validity.

2. Cup and Handle Stop Loss

Setting a stop-loss level is a must in case the pattern fails. When placing your stop loss with the cup and handle pattern, there are a few considerations to remember.

Typically, a suitable stop-loss level is below the lowest point of the cup or handle. This helps to protect your position in case the pattern fails to continue its upward trend.

The stop-loss placement may differ based on your trading strategy, risk tolerance, and market conditions. Depending on their preference, some traders may set the stop loss below the breakout level or the handle low, while others may choose a wider stop loss to have more flexibility. It is crucial to remember that the specific stop loss placement can vary from trader to trader.

Your stop loss should be based on a thorough examination of your chart. You must also consider the risk management principles and follow your trading strategy. If you need help with your trading strategy, the Bullish Bears website has a library of resources. Click here to learn more. 

Cup and Handle Pattern Example

Cup and Handle Patterns

Note the cup and handle pattern on the chart of $SPY. A nice rounded bottom pattern formed at the base of the rising wedge. This confirmed that a key level of support was going to hold. A nice falling wedge pattern preceded the cup and handle formation.

Volume Importance

When analyzing the cup and handle pattern, volume is a critical factor. A positive sign in the cup and handle pattern is a decrease in trading volume, particularly in the base of the cup. This decrease indicates that selling pressure may be drying up and suggests that sellers are losing interest in the stock.

When a stock price reaches the handle part of a pattern, the volume should start to pick up again. This increase in volume shows renewed buying interest and can confirm the pattern’s potential breakout. 

Volume Confirmation

High volume during the breakout suggests strong market participation, increasing the likelihood that the upward run will continue. On the other hand, low-volume breakouts may indicate a lack of conviction, making it less reliable as a bullish signal.

During the formation of the pattern, it’s generally observed that:

  • Trading volume tends to be higher on the left side of the cup,
  • Decreases during the base formation and
  • Increases slightly during the handle and breakout.

Final Thoughts

Cup and handle patterns can take a while to develop. The cup itself can go from 1-6 months. The handle can take a week up to 4 weeks.

Sometimes, it doesn’t take that long at all. Look for a lot of volume on the breakout above the handle resistance to confirm the end of the pattern.

As with any pattern, it’s important to capture the essence of the pattern more so than the particulars. The cup and handle may not capture the particulars but the essence.

To put it another way, the cup and handle may not look perfect, but if you know what it means, you can still trade it. 

Frequently Asked Questions

A cup and handle is a bullish continuation pattern. A bunch of candlesticks form the consolidation of a U-bottom pattern. Once the price is rejected at the top of the cup, it fails and forms the handle. Once the price breaks the cup's top and holds, it's a bullish continuation pattern.

The cup and handle pattern theory means that the pattern is bullish. Rounded bottoms show that support levels are holding a the bullish are looking to push the price up.

Cup and handle pattern failures happen when the price fails to break and hold the top of the cup. Often, the price will do a fake out and drop below the top of the cup, causing the pattern to fail.

The cup and handle pattern is an effective bullish pattern on multiple chart time frames. Traders take a long entry when price breaks and holds the top of the cup.

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