What Is A Cup And Handle Pattern?
A cup and handle pattern is a bullish continuation chart pattern formation that forms on the price charts of a financial market. It resembles a cup with a handle shape and indicates that the price may increase higher if the price breaks out of the pattern.
It was introduced by author and trader William O' Neill in his 1988 book, How to Make Money in Stocks (1).
Cup And Handle Components
In order for a cup and handle pattern to form on a price chart, there needs to be a particular set of components displayed on the price chart of the market.
The components of a cup and handle chart pattern are:
- The cup: The cup is shaped like a large "u" pattern or rounding bottom on the price chart. It usually forms after a bullish trend and consolidation in the price action.
- The handle: The handle is shaped like a smaller "u" pattern and it comes after the cup part of the chart pattern.
- The resistance level: The resistance level is drawn on top of the cup and handle and it connects the swing highs of the pattern together.
These components combined make up a cup and handle pattern.
Without these components, a cup and handle pattern is not complete.
Cup And Handle Chart Pattern Examples
Below are visual examples of the cup and handle pattern on the price charts in different markets.
Example Of A Cup And Handle Pattern In The Stock Market
On the price chart of Tesla stock, a cup and handle formed. After the price breaks out of the pattern, it leads to a fast bullish move over the next few weeks.
Example Of A Cup And Handle Pattern In The Forex Market
On the daily price chart of EUR/USD currency, a cup and handle pattern formed.
After the price breaks out of the resistance level, it leads to a multi-month bullish price trend.
Example Of A Cup And Handle Pattern On A Shorter Timeframe Price Chart
In the above 5-minute price chart, a cup and handle forms. After the price breaks out of the resistance level, it leads to a bullish price push almost immediately.
With the shorter timeframe charts, a trader should be quicker to take profits as the price action bursts tend to be shorter.
Example Of A Cup And Handle Pattern On A Longer Timeframe Price Chart
The above price chart is a weekly chart of Facebook stock.
It formed a classic cup and handle chart pattern. After the price breaks out of the resistance level, it leads to a multi-year bullish price trend.
Cup And Handle Pattern Timeframes
While traditional cup and handle literature restricted cup and handle pattern trading to longer timeframe charts, the modern application of a cup and handle patterns means it's applied and traded on multiple timeframes charts.
It can be applied to shorter timeframe charts like the 1-minute price chart to longer timeframe charts like the daily or weekly price charts.
How To Find Cup And Handle Patterns
To find cup and handle patterns, a trader can:
- Browse through the price charts manually: Manually browse through all the price charts of the markets and try and find the pattern forming and add it to a watchlist.
- Use scanners: Use free scanners to scan for the cup and handle pattern or use parameters within trading scanners to try find the pattern as it forms.
These two ways are how traders and technical analysts find these cup and handle patterns forming in the markets.
Cup And Handle Pattern Benefits
The benefits of the cup and handle pattern are:
- It helps provide clarity to the price action: A cup and handle pattern can help a new trader understand the choppy price action in the market.
- It can signal a large bullish move is near: The cup and handle pattern can signal that a large bullish trending price move is near.
- It can be applied to any market: A cup and handle pattern can be used in any market where it forms.
- The risk-reward ratio can be high: When a cup and handle chart pattern breaks out, it can offer a high reward to risk ratio. For example, risking $1 to make $3 - $5.
These are the main benefits of the cup and handle pattern that traders should be aware of.
Cup And Handle Pattern Limitations
The limitations of the cup and handle pattern are:
- They have a higher fail rate: The cup and handle can have many false breakouts before actually breaking out. Alternatively, the cup and handle pattern can fail and instead break down in price.
- They can be difficult to spot: New traders in particular find it difficult to find the cup and handle patterns forming in the market.
Frequently Asked Questions About Cup And Handle Patterns
Below are frequently asked questions about the cup and handle patterns.
Are Cup And Handles Bullish?
Yes, a cup and handle is a bullish chart pattern formation that when the price breaks out can signal a continuation in a bullish price trend and rising prices.
How Do I Trade A Cup And Handle Pattern?
To trade a cup and handle pattern:
- Wait for the price to reach resistance level: Wait for the chart pattern to completely form and wait for the price to reach the resistance level of the cup and handle.
- Enter a buy order after it breaks out: When the price of a market breaks out of the resistance level on increasing volume, enter a long trade.
- Placed stop-loss at a recent swing low: Place a stop-loss at a nearby swing low area.
- Set price targets: Set a price target at a major level of resistance or trail a profit target along a moving average indicator.
These are the basics steps of trading the cup and handle chart pattern.
How Accurate Are Cup And Handle Patterns?
While backtesting can offer clues as to the accuracy of the cup and handle pattern, there is very little modern evidence of the accuracy of the cup and handle.
One study by Harvard found that on the daily timeframe price charts, the backtesting results found that the cup and handle pattern was successful 68% of the time in the stock market and successful 65% of the time in the Forex market (2).