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How To Trade A Cup And Handle Pattern

Patrick Stockdale
Written by Patrick Stockdale | May 30, 2022

A cup and handle pattern is a bullish technical analysis chart pattern that signals that the price of a market is reversing from bearish price trends to bullish price trends.

A trader will typically use the cup and handle pattern to find buying opportunities in a market where the pattern forms.

The components of a cup and handle pattern include the cup which is the shape of the price action of the cup part, the hande which is to right side of the cup and is shaped like a smaller U and the neckline level which is a resistance level.

These components are important areas to understand when trading the cup and handle pattern.

To trade a cup and handle pattern:

  1. Enter a buy position when the price of a market breaks out above the resistance level: A buy entry is initiated when the price of the market breaks out above the resistance level of the cup and handle pattern. Ideally, there should be an increase in the buying volume on the breakout, although this is not a requirement.
  2. Place a stop-loss either just below the resistance level or below the low price of the handle: A trader can place a stop-loss level when trading a cup and handle either below the swing low price fo the handle section of the pattern or just below the resistance level. This will depend on an individual trader's risk tolerance.
  3. Set a price target: A profit target is set by taking the distance between the high price of the resistance level area and the low price of the cup part of the pattern and adding it to the resistance level. The profit target will then be set at whatever price this works out to be.

Below are visual examples of every part of trading a cup and handle pattern from buying the breakout of the resistance level to placing a stop-loss order and setting price targets.

Cup And Handle Pattern Entry Point

Cup and handle pattern entry point

The first step of trading a cup and handle pattern is entering into a buy position.

The price chart above illustrates where a trader should enter a buy position when trading a cup and handle pattern.

When trading a cup and handle pattern, potential buy entry points for long positions can be entered in two different ways including:

  • Entering a buy position when the price of a market breaks out through the resistance level of the cup and handle pattern
  • Wait for the price of a market to break out above the resistance level and then retest the level to enter the buy trade

The two different areas of entering a buy position when trading a cup and handle pattern are labeled as "Buy Entry" and "Alternative Buy Entry" on the price chart above.

Cup And Handle Pattern Stop-Loss Level

Cup and handle pattern stop-loss level

The next step in trading a cup and handle pattern is where to place a stop-loss order.

When trading a cup and handle pattern, there are two potential areas to place a stop-loss level including:

  1. Placing a stop-loss order just below the swing low price of the handle part of the pattern
  2. Placing a stop-loss order just below the resistance level of the cup and handle pattern.

The two different areas options for where to place a stop-loss order when trading a cup and handle pattern are labeled on the price chart above as "Stop-loss level" and "Alternative stop-loss level".

Typically, a trader that places their stop-loss level just below the resistance level will get a higher reward to risk ratio when the trade position works out.

However, this stop-loss level tends to have a lower win rate.

Cup And Handle Pattern Price Target

Cup and handle pattern price target

The final step of trading a cup and handle pattern is setting a price target for the trade.

A price target for a cup and handle pattern is set by taking the distance between the bottom price of the cup part of the pattern and the resistance level and adding it to the breakout point over the resistance level.

On the price chart above, the profit target area is labeled "price target level".

Cup And Handle Pattern Trade Examples

Below are chart examples of trading a cup and handle pattern in different markets.

Example Of Trading A Cup And Handle Pattern In The Stock Market

Cup and handle pattern trade example in the stock market

On the price chart of Tesla stock above, there is an example of a cup and handle pattern trade from start to finish.

When the price of Tesla stock breaks out above the resistance level, a buy trade is entered (labeled "Buy Entry").

A stop-loss order is placed at the price level below the swing low price of the handle part of the pattern (labeled "Stop-loss level").

A price target is set by taking the distance from the swing low price of the cup to the resistance level and adding it to the resistance level price (labeled "Price Target").

This is a full example of trading a cup and handle pattern in the stock market.

‍Example Of Trading A Cup And Handle Pattern In The Forex Market

Cup & Handle trade example in the forex market

On the price chart of the EUR/USD forex currency pair, there is an example of a cup and handle pattern buy trade from start to finish.

The price of the currency pair breaks out above the resistance level which triggers the buy trade (labeled "Buy Entry").

The stop-loss for the buy trade on the EUR/USD is placed at the swing low price of the handle part of the pattern (labeled " Stop-loss level").

The price target is set by taking the difference between the low price of the cup and the price of the resistance level and adding that to the breakout level. It is labeled "Price Target" on the chart.

Interestingly, in the EUR/USD cup and handle pattern trade, the price of the currency reaches the price target and starts to consolidate around that area, suggesting that other traders also traded the pattern in this exact manner.

Example Of Trading A Cup And Handle Pattern In The Commodities Market

Cup and handle pattern trade example in the commodities market

On the price chart of Soybeans above, there is an example of trading the cup and handle pattern in this market.

A buy entry price is entered when the price of Soybeans breaks out above the resistance level of the pattern (labeled "Buy Entry").

A stop-loss order is placed at the swing low price of the handle part of the pattern, labeled "Stop-loss level" on the price chart.

A price target is set by taking the distance between the swing low price of the cup part of the pattern and the resistance level price and adding that distance to the breakout point. This target is market "Profit target" on the above chart.

Frequently Asked Questions About Trading The Cup And Handle Pattern

Below are some frequently asked questions about trading the cup and handle pattern.

Is It Difficult To Trade A Cup & Handle Pattern?

The cup and handle pattern is relatively easy to trade and understand with a few simple steps that need to be followed.

When Should A Trader Not Trade A Cup & Handle Pattern?

A trader should not trade a cup and handle pattern when:

  • They don't know where to place a stop-loss
  • When there is an important news announcement due to be reported soon
  • When the price does not break out above the resistance level
  • When they are unsure as to whether it is a cup and handle pattern in the first place

Is There A High Risk When Trading A Cup & Handle Pattern?

Every trade carries with it a level of risk. However, trading a cup and handle pattern will have a lower level of risk if a trader places the correct stop-loss level and follows the rules of cup and handle pattern trading. High risk comes if a trader chooses to not place a stop-loss level or trades the pattern right before important news announcements.

Can Beginner Traders Trade A Cup & Handle Pattern?

Yes, a beginner trader can trade a cup and handle pattern once they understand where to enter, where to place a stop-loss order and where to set price targets.