Watch our video on how to identify and trade cup and handle patterns and read our posts with examples below.
They are considered to be bullish continuation patterns. The cup and handle pattern gets its name because it looks exactly like that. Watch our video above to learn more about cup and handles.
Patterns, like the c & h pattern, are such an important part of trading. Moreover traders are creatures of habit. As a result, they look for patterns to trade.
We trade Japanese candlesticks patterns because of the 17th century Japanese rice trading market. Homma realized they needed a way to gauge how traders felt against the price of rice.
We still use this method to this day. Whether bullish candlesticks, bearish candlesticks or doji candlesticks each one tells a story. When you group them together, they tell an even bigger story.
Cup and handle patterns are pretty 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 awhile 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 give you warnings about what's going to happen. If the handle breakout fails, there was probably candlestick warnings along the way (check out our stock market basics post to learn more of the basics of trading).
These patterns are a U shape. In fact, you want to avoid a sharp V shape because this then changes the pattern. As a result, the cup should resemble a bowl or kind of a rounding bottom.
If it formed a V it would be considered too sharp for a reversal. The softer the U shape of the cup, the more it ensures the cup is the consolidation pattern.
The cup also doubles as a pretty 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.
Hence why we show real world examples. Real world examples show you that patterns, like c&h patterns, can be messy. That's why studying is important, and attending our daily live streams. You're going to be right there with us, shoulder to shoulder learning the markets from people who give a hoot about you.
The handle of cup and handle patterns form on the right side. Handles are formed by pullbacks. 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 cup and handle 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 awhile to break resistance.
That could be a problem if you're trading options for a living. Options expire and if you don't give yourself enough time, you'll lose that investment. That's why getting conformation is a good thing.
Don't think of missing the first move up as a bad thing. That can be the difference of profit and loss. Especially if the pattern breaks down or the bulls are caught in a trap.
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. Take our candlesticks patterns course.
C&H patterns take awhile to form. That's why it's important to see the patterns within the patterns. As you're waiting for the handle breakout take advantage of the other trades you can make. Meaning, there might be another stock with a momentum pattern that is happening now. Sometimes its good to sit on our hands and not take a trade while we wait for our setup to come together. Being patient is one of the hardest parts in trading!
Once you have mastered this pattern, its easy to find the opposite pattern. The inverted cup and handle pattern. Look for it to from on charts, sometimes an inverted cup forms right after a regular cup!
Being able to see this pattern helps you catch the breakout when it comes. Studying these patterns and how how to trade them helps you become the best trader you can be. Take our free online trading courses.