Direction: Reversal or Continuation
What Is The Cup And Handle Chart Pattern?
Cup and handle is a bullish chart pattern, commonly found either at the bottom of a trend as a reversal pattern, or mid-trend as a continuation pattern.
Price action takes on the rounded appearance of the bottom of a cup, with a small correction forming the handle.
A breakout occurs when neckline resistance is broken.
How To Identify The Cup And Handle Pattern?
Price action follows a rounded U-bottom shape to form a cup. After resistance is reached, price consoldiates below resistance to create the handle. The handle must be located on the right side of the pattern.
Cup duration can last from anywhere between 7 to 65 weeks. There is a minimum one week requirement for a handle to be valid.
What Is The Psychology Behind The Cup And Handle Pattern?
The Cup and Handle pattern is a bullish chart pattern that can provide traders with valuable insights into the market’s psychology.
It’s characterized by a curved “U” shape followed by a smaller downward-sloping trendline, forming the shape of a cup with a handle.
The pattern typically takes several weeks or months to form and is a sign of consolidation before a potential bullish breakout.
Traders interpret the pattern as a sign of accumulation, where buyers are gradually building up their positions before pushing the price higher.
The psychology behind the cup and handle pattern is that buyers are becoming increasingly confident in the market’s direction.
As the price begins to consolidate, buyers are accumulating assets and building up a base of support.
This creates a situation where the supply of sellers is decreasing, while the demand for buyers is increasing, which ultimately results in a breakout to the upside.
The handle of the cup and handle pattern is a sign of consolidation and indicates that buyers are taking a breather before pushing the price higher.
How To Trade The Cup And Handle Pattern?
To trade the Cup and Handle pattern, traders typically wait for the price to break through the upper trendline of the handle with a strong volume surge.
The breakout should ideally occur on higher than average trading volume. This confirms that there is significant buying pressure behind the move.
Traders may enter a long position once the price breaks above the upper trendline of the handle. A stop loss is placed below the bottom of the cup.
Alternatively, traders may wait for a throwback to the breakout level before entering a long position.
This approach can provide a better risk-to-reward ratio, as the entry price is closer to the breakout level and the stop loss can be placed tighter.
However, it may also result in missing out on some of the initial gains from the breakout. Ultimately, the best approach will depend on the trader’s risk tolerance, trading style, and market conditions.
It’s worth noting that the cup and handle chart pattern can also result in a false breakout. In this situation, price briefly breaks through the upper trendline before reversing course.
Cup And Handle Performance Expectations Explained
A bullish breakout can be expected the majority of the time. To find potential targets, measure from the lowest point of the cup to the cup rim resistance. Project the measurement multiplied by 61% to the point of breakout.