The Most Reliable Cup and Handle Pattern that Generates High-Probability Trade Setups

Cup and handle pattern is one of the most reliable patterns that generates strong and high-probability trade setups. This patterns looks exactly as it’s named. It looks like a cup and its handle when you look at it from the side.

The cup and handle pattern occurs in both small time frames, like the one-minute chart, and in large time frames, like daily, weekly, and monthly charts.

It occurs when there is a price wave down, followed by a stabilizing period, and followed by a rally of approximately equal size to the prior decline.

It creates a u-shape, or the “cup” in our”cup and handle.”the price then moves sideways or drifts downward within a channel—that forms the handle.

The handle may also take the form of a triangle.

The handle needs to be smaller than the cup.

Also, the handle should not drop into the lower half of the cup, and ideally, it should stay in the upper third.

So there are 4 different stages that lead to this pattern.

 

• 1st stage, from A to B: cup and handle pattern starts forming when the market starts going down strongly. The down movement forms the left side of the cup.

• Second stage, from B to C: after a while of having a strong bearish market, bears becomes exhausted so the down movement becomes slower, and we will have a sideways market for a short period of time. This sideways movement forms the bottom of the cup.

• Third stage, from C to D: the bulls take the control and the market starts going up strongly, like when it started going down strongly at the beginning of the formation of the cup. This strong up movement forms the right side of the cup.

• Forth stage, from D to E: after a period of going up, the bulls become exhausted too, and so the market stops going up strongly and forms a small sideways section which is the cup’s handle. This part is very important because this is where we can anticipate the next direction of the market.

A cup and handle chart may signal either a reversal pattern or a continuation pattern.

A reversal pattern occurs when the price is in a long-term downtrend, then forms a cup and handle that reverses the trend and the price starts rising.

A continuation pattern occurs during an uptrend; the price is rising, forms a cup and handle, and then continues rising.

 

Now, how to enter a cup and handle trade.

Wait for a handle to form. The handle often takes the form of a sideways or descending channel or a triangle.

Look for BUY entries when the price breaks above the top of the channel or triangle. When the price moves out of the handle, the pattern is considered complete, and the price is expected to rise.

While the price is expected to rise, that doesn’t mean it will.

The price could rise a little and then fall, it could move sideways, or it could fall right after entry.

For this reason, a stop-loss is needed. Place a stop-loss below the lowest point of the handle.

If the price oscillated up and down a number of times within the handle, a stop-loss might also be placed below the most recent swing low.

Since the handle must occur within the upper half of the cup, a properly placed stop-loss should not end up in the lower half of the cup formation.

By having the handle and stop-loss in the upper third (or upper half) of the cup, the stop-loss stays closer to the entry point, which helps improve the risk-reward ratio of the trade.

The stop-loss represents the risk portion of the trade, while the target represents the reward portion.

Picking a target or an exit point is easy.

Whatever the height of the cup is, add that height to the breakout point of the handle.

You have to plot a horizontal line above the handle’s highest level.

The distance of this line from the bottom of the cup is the size of the up movement that will occur after the handle resistance breakout.

In this example, i have plotted a horizontal line above the handle highest high, then another horizontal line below the lowest low of the cup.

This is the distance of these two lines.

If we had taken a long position after the handle resistance breakout, we expected that the market would go up for the same distance.

This is called a PROJECTION TARGET.

As you can see, the market did reached its projection.

Sometimes the left side of the cup has a different height than the right one.

Use the smaller height, and add it to the breakout point for a conservative target.

Or use the larger height for an aggressive target.

A Fibonacci extension indicator may also be used.

Draw the extension tool from the cup low to the high on the right of the cup, and then connect it down to the handle low.

The 100% level, represents a conservative price target, and 162%, is a very aggressive target.

If you’re day trading and the target is not reached by the end of the day, you could close the position before the market closes for the day.

A trailing stop-loss may also be used to get out of a position that moves close to the target but then starts to drop again.

 

The cup and handle chart pattern does have a few limitations.

• Firstly, it does not occur within a specific time frame. Sometimes it forms within a few days, but it can take up to a year for the pattern to fully form if you’re trading on higher time frames.
• Secondly, you need to learn to identify the length and depth of a true cup and handle, as there can be false signals.

Here is another important tip:

• the longer and rounder the bottom, the stronger the signal.
• Also remember that the cup should not be ‘v’ shaped or too deep.