
Among patterns, the Cup and Handle is one of the most popular in technical market analysis. It is widely used by traders in attempts to pinpoint some market entry points and predict continuations of uptrends. The Cup and Handle pattern explains how to determine when the asset will be at its consolidation stage while getting prepared for further growth. Traders are always on the lookout for Cup and Handle stocks since this pattern indeed shows a potential bullish breakout. In this respect, such stocks, after the handle is built, become more appealing for traders expecting further uptrend continuation.
In this article, we consider in detail how this pattern is formed and how to use it in market analysis. We also discuss the important aspects that must be considered while using it.
What Is the Cup with Handle?
It is a continuation pattern fairly frequently seen on Cup and Handle stock chartsthat may lead to a breakout continuation after some consolidation and then a minor pullback. The Cup and Handle pattern is one of the classic graphic figures of technical analysis. This figure takes the shape of a cup with a small handle. The figure appears on the chart after the period of an uptrend is faced by consolidation. Further, slight adjustment forms a “handle.” If all goes right in this pattern, the price breaks the resistance level and resumes upward movement. In this strategic trading, a trading platform such as MyForexVPS offers reliable and stable connections to traders; therefore, no trading opportunities shall be lost.
Main Elements of the Pattern
The Cup with Handle pattern is mainly formed into two formations — the cup and the handle.
- Cup: The “cup” is formed when the price of an asset goes higher, reaches the peak, and starts to gradually go lower creating a rounded, curving low. Then, after the low, the price begins to rise again to the level of the previous peak. The shape of the cup must be rounded, which indicates a gradual consolidation of the market rather than sharp fluctuations.
- Handle: After the cup is formed, the price corrects itself slightly, forming a small sideways or downward movement — the “handle.” Normally, this pullback is shorter than the cup and doesn’t generate severe losses. It normally lasts a few days or weeks (in the case of long-term charts).
Once the handle is complete, the price will break higher, through the resistance level formed at the top of the cup to indicate further upside can be made.
The Importance of Volume in Pattern Analysis
Volume is crucial to validate the Cup with Handle pattern. Whereas the formation of the cup is usually attended by declining volume, reflecting decreased interest in the asset, the price action when the handle has formed, particularly when the breakout is happening, shows a sharp surge in volume. This means active buying by traders confirms the continuation of the uptrend. So, if the volume during the breakout has remained low, it might not confirm the breakout, and the price could easily return to the level of resistance or even fall beyond it.
Determination of Profit Targets and Stop-losses
These include computing the potential profit target and correctly placing the stop when using the Cup with Handle pattern.
- Profit objective: Normally, the targeted profit level is estimated by buyers using the height of the cup from its lowest level to where the resistance level is. This value should be added to the breakout level once the handle has been formed. For example, if the low of the cup against the resistance level is $10, you should see the price surge high by another $10 after the breakout.
- Stop-loss: Set the stop loss just below the bottom of the handle or below the support level created by the cup. By doing this, you will be able to limit the risks if this pattern is not realized and the price starts to go down.
Varieties of the Pattern
One could find several varieties of the Cup with Handle pattern, which may look somewhat different from one another, depending on their position in the chart or market conditions:
- Classic Pattern: Develops on an uptrend and usually indicates that the trend is likely to continue after a brief consolidation.
- Inverted Cup with Handle: This pattern is an upside-down version of the classic and indicates, in most cases, the resumption potential of the downtrend. An inverted cup signals a small decline, while a handle shows a minor bounce before further decline.
- Short-term and long-term patterns: A pattern might be formed in short and long-term time frames. The short-term version of any pattern takes days to form, while the long-term one takes weeks or even months.
Advantages and Limitations of the Pattern
Advantages
- The pattern is caught so easily from the charts that its popularity among beginners and experienced traders is immense.
- It is a reliable indicator of the trend continuance, especially if it is properly confirmed by volume.
- It also allows traders to clearly define entry and exit points, which minimizes risks.
Limitation
As with any other technical pattern, Cup with Handle does not work out in 100% of cases, and it is required to confirm the breakout with the help of other indicators. This may not work if the overall market is uncertain or a strong downtrend begins. It requires some time to build, which might not be the right option for traders who rely more on short-term strategies.
Examples of Practical Usage
Let’s consider the conditional example. Shares of company X are on an uptrend and have reached a high of $100. Following this the stock price drifted down to a bottom of $80, thus completing the cup portion of the pattern, before slowly changing direction upwards again to $100. At this point, it retreats a little to $95, thereby creating a handle.
On the positive side, it again breaks above $100 when the volume is rising; then, it sets a breakout for a further rally of the stock up to new highs.
Conclusion
The Cup with Handle pattern is among the potent technical analysis tools whereby traders enter the market based on foreclosure and predict further movements in the price. Trading or using this pattern requires much patience and attention to minute details in trading volume and overall market context. Although perfection may not be obtained from this pattern, its correct applicatin can do wonders in making the trading strategy more effective.