Summary: The Cup and Handle Chart Pattern is a bullish continuation/reversal pattern that looks like a teacup, signals a potential bullish breakout. It features a “U”-shaped cup followed by a small downward handle. Once the price breaks above the handle’s resistance, it indicates a strong bullish move is coming soon. This pattern helps traders find good buying opportunities in the market.
The Cup and Handle Chart Pattern is one of the most reliable bullish patterns used by many traders around the world. This classic pattern can give you an edge in finding profitable breakout opportunities.
In this blog post, we’ll learn about the Cup and Handle chart pattern, how to identify it, trading strategies, examples, and essential tips to consider while trading with it. So, let’s discuss…
What is the Cup and Handle chart pattern?
The Cup and Handle Pattern is a technical chart pattern that looks like a tea-cup. It consists of two main parts:
- The Cup: A rounded bottom that looks like a “U”, showing a consolidation phase after a price decline.
- The Handle: A short consolidation or pullback following the cup, forming a small downward channel or sideways movement.
This pattern signals a bullish breakout once the price breaks above the handle resistance.
How to Identify the Cup and Handle Chart Pattern
To correctly identify a Cup and handle pattern on a chart, look for the following steps:
- This pattern can appear in an uptrend (continuation) or after a downtrend (reversal).
- You’ll see a rounded bottom that looks like a “U” shape that forms the cup.
- Then comes a small dip or sideways movement that forms the handle.
- When the price breaks above the handle, it signals a good time to enter a buy trade.
Formation of a Cup and Handle Pattern
Example 1: HPL Electric & Power LTD, Cup and handle Formation Analysis
Cup Formation
The cup forms when the price slowly drops and then slowly rises, creating a smooth “U” shape. It should not look sharp like a “V” or deep.
Handle Formation
After the cup is formed, the price moves sideways like a falling channel, forming the handle. This handle is smaller in size. The dip in the handle should be around one-third or half the depth of the cup.
Breakout
The pattern is completed when the price breaks above the resistance level formed at the top of the cup and handle.
How to Trade Cup and Handle Pattern
Once you’ve spotted this masterpiece, get prepared for the perfect trading entry!
Entery
When the price confidently breaks and closes above the resistance, it is a sign that the pattern is about to reveal its full potential.
Traders enter a long position when the price breaks above the resistance level. This breakout offers a good opportunity to ride the wave of success!
Experience Note – Use these three powerful entry techniques: The breakout with buildup, The Re-test, and The First Pullback.
Stop Loss
The stop-loss should be placed below the handle’s low to limit the loss.
Note: If the price moves in your direction, trail your stop loss using this technical indicator (eg, 20 Moving Average) to protect your gains.
Exit
Measure the distance from the cup bottom to the resistance, then add that same distance above the point where the breakout happens. This gives you a rough idea of where the price might go next.
Pros & Cons of Cup and Handle Pattern
Pros
- High success rate
- Easy to find on charts
- Works well on longer timeframes.
Cons
- Requires patience for full formation
Common Mistakes to Avoid
The duration of the pattern plays a key role, the longer it takes to form, the stronger and more significant to find the reversal signal. Shorter patterns are weaker and more likely to get false breakouts.
- Entering too early before breakout confirmation
- Misidentifying V-shaped bottoms as cups (cups should be rounded)
Here’s what I’m curious about…..
Have you traded the cup and handle patterns before? What is your favorite chart pattern aside from this?
Let me know in the comments below and share your thoughts!…..