Cup and handle patterns are a bullish pattern that look like the name that they are called. Price moves up to a peak level and then starts to pull back or fall rapidly. Once price has found a base, several candlesticks form the rounded cup bottom. Then, price goes back up to the 1st peak level. At this point, price fails to break resistance and retraces down the side of the cup, thus forming the handle. Look for breakout at top of 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 top of the cup, price rejects and creates a falling wedge or falling channel. This is what forms the handle portion of 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.
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.
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.
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. Options expire and if you don’t give yourself enough time, you’ll lose that investment. 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 of profit and loss. Especially if the pattern breaks down or the bulls are caught in a trap.
How to Trade Cup and Handle Patterns
- Watch for u bottom consolidation to form cup pattern
- Watch for price to reject top of the cup and form handle formation
- Next, look for price to break out of 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 base of handle
- Some traders take a long position once price breaks out of the handle
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.