A Cup and Handle is a bullish continuation chart pattern that marks a consolidation period followed by a breakout.
Chart patterns form when the price of an asset moves in a way that resembles a common shape, like a rectangle, flag, pennant, head and shoulders, or, like in this example, a cup and handle.
There are two parts to this chart pattern:
- The cup
- The handle
The cup forms after a downtrend is followed by an uptrend and looks like a bowl or rounding bottom.
As the cup is completed, price trades sideways, and a trading range is established on the right-hand side and the handle is formed.
A breakout from the handle’s trading range signals a continuation of the previous uptrend.
How to Trade the Cup and Handle Chart Pattern
The cup should resemble a bowl or rounding bottom.
The perfect pattern would have equal highs on both sides of the cup, but in the real world, perfect doesn’t exist.
After the high forms on the right side of the cup, there is a pullback that forms the handle.
The handle is the consolidation before the breakout.
The handle needs to be smaller than the cup. The handle should not drop into the lower half of the cup, and ideally, it should stay in the upper third.
The buy point occurs when the asset breaks out or moves upward through the old point of resistance (right side of the cup).
This breakout should occur with increased volume.
The price target following the breakout can be estimated by measuring the distance from the right top of the cup to the bottom of the cup and adding that number to the buy point.