Cup and handle pattern

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.

A cup and handle is typically considered a bullish continuation pattern. That said, it matters more how the price moves after the cup and handle has formed that determines whether the price action​​ is likely to continue being bullish or moving in a higher direction. Once a cup and handle pattern forms, in order to generate a bullish trade signal, the price must break above the top of the handle that has formed.

The cup and handle pattern can take on several variations in appearance. For example, a cup is not always a smooth “U” shape. It may be wavy, making small swings up and down as it forms the overall cup shape. The price may also rise and fall sharply, forming a “V” shape. The following gold monthly chart shows both a V-shaped cup and handle, as well as a large U-shaped cup and handle that is potentially forming. The latter pattern is not confirmed yet since a handle has not formed.

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.