Cup and Handle Chart Pattern Definition: Price charts of a trading market often form several shapes. These shapes can be a good indicator for the anticipation of prices or trends. Every shape denotes some meaning. Shapes like a triangle, ‘V’, head & shoulders, and cup with handle are popular.
In this article, we would discuss the cup and handle chart pattern. We would first start with understanding the inception of the model, meaning, followed by some guidelines.
Cup and Handle Chart Pattern
Cup and handle pattern is a technical indicator of a potential bullish market. As the name suggests, the price line on the chart forms a shape like a cup. It was introduced by William O’Neil in a 1988 book, “How to make money in stocks?”
Cup and handle are formed after a price downtrend, followed by a stable round price line, and then bouncing back to the prior level. It results in the formation of a ‘U’ or ‘bowl’ type shape. This trend is followed by a small price correction and comes back again, resulting in forming a handle along with the cup-like price line. Usually, the cup with handle pattern marks the continuation of the bull trend.
However, it is much more complicated to spot a cup with handle pattern than any other technical indicator.
William O’Neil also precisely described the time frame for each rounding shape of both cup and handle. In other words, it means he described how long the bottom round shape should be, how deep the handle should be, or how much time the cup formation should take!
The cup & handle pattern applies to both small time frames, like one or five minutes chart, as well as to the long time frames, like the monthly or quarterly chart.
What Cup and Handle Pattern Implies?
A trader can make use of this tool and anticipate the future trend of a price chart. This well-researched technical indicator is an excellent opportunity for buying and selling both.
As we discussed, it marks the continuation of an uptrend. Let us understand this for both the situations, i.e. uptrend and downtrend.
If a cup and handle chart pattern comes in an uptrend price chart, then the shape marks the continuation of the trend. The price was rising, and then it fell, and then continued the trend, with more power.
Similarly, for a downtrend, the cup and handle pattern is a reverse trend. The price was falling, but suddenly the trend is reversed, followed by a slight fall again, and at last, the price started increasing.
There are specific guidelines for any price chart shape to be described as a cup and handle pattern. The most obvious is the handle should be smaller than the cup shape, in-depth and length both. Also, the rule is the lowest point of the handle should not be below 50% of the cup. However, O’Neil described the ideal handle to be 1/3rd of the bowl.
A cup should form a round shape at the bottom level and not a ‘V’ like shape. A trader should be wary of it. Also, the cup should not be very deep, and the trading volume should also decrease as the price falls.
So, this was all about the basics of a Cup with Handle pattern. For a better understanding, below is a diagram or example of the same. Observe it carefully and then finish this article with the summary.
The cup and handle pattern is a visual-technical indicator for trading. A trader can predict the entry and exit points easily using it. However, start trading only once the cup and handle have formed completely.
Moreover, it is also one of the limitations for users. Identifying “cup and handle” takes too much time for a longer-term chart. It might take weeks to form the shape.
Thus, we would suggest you to also use other technical analysis books, tools and indicators for predicting the market moves, along with it.
One last thing,
One must use a stop loss when trading after the cup with handle indicators!