Cup and Handle Patterns in Trading (2024)

A cup and handle pattern is formed when there is a price rise followed by a fall. The price rallies back to the point where the fall started, which creates a “U” or cup shape. The price then forms the handle, which is a small trading range that should be less than one third of the size of the cup. It can be horizontal or angled down, or it may also take the form of a triangle or wedge pattern​.

When the pattern is complete, a long trade could be taken when the price breaks above the handle. However, some traders make the mistake of assuming that once a U-shape forms, the price will drop to form a handle. It may not, so you should ideally avoid trading the pattern until it has fully formed, in order to confirm the trend. You could wait for the price to break above the handle to signal that the uptrend is continuing. This is called a bullish continuation pattern.

Cup and handle patterns are also traded in the forex market, especially by day traders​​. When intraday trading, cup and handles tend to perform better during active times of a specific currency pair. When the forex markets are not open, the pair tends to be quieter, which means less movement, and it also means that intraday cup and handle patterns will not form as strongly. This is because there is not sufficient momentum to fuel a breakout and bullish trend.

For swing traders, trading on four-hour, daily, weekly, or monthly charts, cups and handles are traded in the same way as discussed throughout the article.

Shares and stock indices with lots of upward momentum prior to the cup and handle forming tend to produce the most favourable cup and handle patterns for trading. If a stock or index is strongly rallying prior to the cup and handle forming, there is a high chance that many buyers are already interested in the stock and will step in to fuel the price higher once the cup and handle forms. In this case, traders may focus on stocks or indexes that saw strong percentage advances heading into the cup and handle pattern.

The Big Tech share basket chart provides an example of this. Prior to the decline that started the cup and handle pattern, the price had advanced about 30% over several months. The upward momentum carried through following the cup and handle.

The reverse cup and handle pattern is an upside-down cup followed by a handle and a breakout to the downside. It represents a bearish continuation pattern. The pattern is formed by a drop, a rally, then another drop back to where the rally started. A handle forms, which should be less than a third the size of the cup.

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. Alternatively, traders could double the size of the handle and subtract that from the handle breakout point.

Below is an example of an inverted cup and handle on the FTSE 100 weekly chart. Although the pattern formed and the price did decline, ultimately, the price did not follow through to the downside.

The cup and handle pattern can be seen almost as a trading strategy, as the pattern provides an entry on the handle breakout, a stop-loss below the handle and a profit target based on double the handle size or the height of the cup. The pattern can be traded on all markets and timeframes. No technical pattern works all the time, which is why a stop-loss is used to control the risk on trades that are less efficient.

When studying price charts for trading patterns, our online trading platform, Next Generation, comes with a vast range of drawing tools that you can use to display your data more clearly. This includes drawing trendlines for the handles to highlight the breakout points, notes to mark important areas, or arrows to highlight potential entry and exit points. We also offer a chart scanner with pattern recognition software that works automatically to detect and highlight trends for your ease of trading.

Register for a live account now or practise first with virtual funds on our demo account to familiarise yourself with the platform.

The entry point for a cup and handle pattern is to buy when the price moves above the handle formation. 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.

An estimated target is the height of the cup added to the handle breakout point; however, this may not always be met, as it requires a large price movement. A more conservative target is taking the height of the handle, multiplying it by two and adding it to the breakout price of the handle. This method provides a trade with a 2:1 risk/reward ratio​​. The potential profit is twice the risk because the risk is the size of the handle.

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