Table of Contents
A cup and handle pattern is one of many classic technical indicators that traders can use to identify potential price movements. The cup and handle pattern is considered a bullish continuation pattern that may signal a bigger upward trend.
Traders can use the bowl-shape of the cup to help set a buy order based on the handle — which often signals a breakout.
Typically, traders use these technical indicators in combination with each other to determine entry and exit points for trades.
Key Points
• The cup and handle pattern is a classic technical indicator that’s considered a bullish continuation pattern which may signal a bigger upward trend.
• The pattern has two parts: the U-shaped “cup,” representing a decline and rise in price, and the “handle,” representing a brief period of price consolidation.
• Traders typically look to buy when the price breaks out from the handle, moving above the old resistance level, which is the top of the right side of the cup.
• The price target after a breakout is estimated by measuring the depth of the cup and adding that distance to the buy signal point.
• Since the pattern is not a guarantee of price movement, it should be used in conjunction with other trend indicators and signals to make trading decisions.
What Is a Cup and Handle Pattern?
The cup and handle trading pattern is a bullish continuation pattern used in technical analysis. When this candlestick pattern appears on a stock chart, it shows a period of decline, followed by a rise in the security’s price, then a brief price consolidation followed by a breakout.
The pattern is called cup and handle because it has two distinct parts.
The cup shows the U-shaped decline and rise in the security’s price, similar to the round shape of a tea cup, followed by a short pullback or consolidation in price (within the trading range) to the right, which resembles a handle.
Finally, there is a breakout above the range of the handle, and above the upper rim of the cup, showing a bullish continuation indicator of the prior advance.
Stock broker William O’Neil identified the cup and handle stock pattern, and introduced it in his 1988 book, How to Make Money in Stocks.
How the Cup and Handle Works
The cup-and-handle candlestick pattern starts with the formation of the “cup,” in which the descending and ascending candlesticks appear to form a bowl shape. The two sides of the cup are not always the same height, though they can be. Ideally, the cup shape is shallow, with a flat bottom, not a steep V-shape.
Once the cup forms, the stock price pulls back, forming a “handle” out to the right of the cup. The handle shows price consolidation happening, often before a price breakout occurs.
The handle is smaller than the cup and generally doesn’t retrace more than ⅓ of the cup’s advance, staying in the upper part of the cup range. If the handle forms at the bottom price range of the cup, the pattern may indicate that this is not a good time to trade. It may take six months or longer for the cup pattern to form, but the handle forms much faster, often within four weeks.
What the Cup and Handle Patterns Indicates
The entire pattern can also form within minutes or days. Technical analysts who buy stocks online try to buy when the price breaks out from the handle. This is marked by when the price moves above the old resistance level, which is the top of the right side of the cup. The more volume in the breakout the stronger the buy signal.
To estimate the price target the stock might hit after the breakout, a trader would measure the distance from the bottom of the cup to the top of the right side of the cup and then add that number to the buy signal point. If the left and right sides of the cup are different heights, when trading stocks, the smaller side would give a more conservative price target, and the taller would be a more aggressive target.
Recommended: How to Use Technical Analysis
What Does a Cup and Handle Pattern Tell Traders?
The cup-and-handle is a candlestick pattern that involves a downward price movement, a stabilization period, then a price increase of about the same amount as the previous downward movement.
This is followed by a sideways pullback between the high and low of the cup shape, forming the handle. Then, often a price breakout occurs, indicating increasing trade volume. However, as with any trading pattern, a cup-and-handle pattern does not guarantee the stock price will continue on a bullish trajectory, it’s just one trading indicator of many.
The cup and handle is a bullish pattern that can show a continuation or a reversal from a bearish trend into a bullish trend.
Either way, for self-directed investing, it indicates that the stock price will likely rise following the pattern.
Example of a Cup and Handle Pattern
An example of a cup and handle pattern would be if a cup shape forms between $48 and $50. A handle should then form between $49 and $50, ideally closer to $50. Then the price potentially would break out above the price range of the handle.
As with any technical indicator, however, there are no guarantees. Traders generally use these stock chart patterns as guidelines for possible trades.
Does the Cup and Handle Pattern Work?
The cup and handle pattern is one strategy that traders can use to get a sense of a security’s price trends, and inform their investing decisions. However, it is not a perfect tool.
Like any trading pattern, the cup and handle should be used in conjunction with other trend indicators and signals to make informed trading decisions. Although the cup and handle pattern can be a useful and easy to understand pattern to find entry and exit points, it does have some drawbacks.
The cup-and-handle pattern may form over the course of a day, weeks, months, or even a year. This makes it challenging to figure out exactly when to place a purchase order. Generally it forms over a month to a year, but identifying the exact breakout point is not easy.
Also, the depth of the cup can be a confusing part of the pattern. A shallow or a deep cup might be a false signal. The cup also doesn’t always form a handle at all, and the liquidity of the stock also affects the strength of the trading signal.
How to Trade a Cup and Handle Pattern
Traders wait for the handle pattern to form, which may either be in the shape of a sideways handle or a triangle. When the stock price breaks out above the top of the handle, that indicates completion of the cup-and-handle pattern, and creates a signal that stock price could continue to rise.
Although the cup-and-handle pattern can be a strong buy indicator, it does not guarantee that prices will go up. The stock price may rise, fall again, then continue to rise. Or it might rise and then simply fall.
One way to avoid significant losses when this happens is to set a stop-loss order on trades with your broker. Day traders may want to close out the trade before the market closes.
The Takeaway
Stock patterns are signals that may form a certain recognizable shape when charted graphically, making them easy to spot and trade. They can help traders find entry or exit points, estimate price targets and potential risk. The cup and handle pattern is a useful and easy-to-follow trading pattern to help traders spot entry points for bullish trades.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
FAQ
Is the cup and handle pattern bullish?
Yes, the cup and handle pattern is considered a bullish signal, and investors may take it as a sign that they should go “long” on an investment or specific market position.
How reliable is cup and handle pattern?
The cup and handle pattern is merely an indicator, and not a sure sign that a price will move in a certain direction. That said, investors may consider using it in conjunction with other trading strategies and methods, and along with other trend markers.
What are the rules for the cup and handle pattern?
The cup and handle pattern doesn’t have “rules”, per se, but instead is a pattern that forms on a stock chart. That form shows a stock price decreasing in price over a short period of time, then stabilizing, forming a “cup,” which is then followed by a price consolidation, creating the “handle” — sometimes followed by a breakout.
What is the weekly timeframe for the cup and handle pattern?
Cup and handle patterns can emerge on a stock chart over several months, but many times, over a handful of weeks.
Photo credit: iStock/jacoblund
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.
SOIN-Q126-041