What is Cup and Handle Pattern

The cup and handle pattern is a bullish continuation chart pattern that is used to analyse potential price breakouts after a consolidation phase. This pattern is formed when the price declines initially and then recovers further by creating a rounded cup that shows fading of selling pressure. This improves the buying interest, which is followed by a short consolidation or mid pullback known as the handle. This is formed near the previous resistance level and indicates the building strength before moving back upward. The bullish signal is confirmed once the price breaks above the resistance level at the top of the cup with increased trading volume. This pattern is used by traders to know the time entries after the breakout and to calculate the price targets based on the depth of the cup.  

How to Identify Cup and Handle Pattern   

The process of identifying a cup and handle stock pattern is simple. Investors need to just follow the steps given below.  

• Look for a Strong Uptrend: Investors need to first identify a stock or asset that has a clear uptrend. As the cup and handle chart pattern  works appropriately in a continuation pattern. This means that the pattern generally appears after a sustained price rise rather than in sideways or falling markets.  
• Spot the Rounded Cup: On the chart, they need to observe a gradual price decline followed by a steady recovery that forms a smooth, rounded “U” shape.  Investors need to make sure that the cup should be rounded and not sharp, as this reflects a healthy consolidation and gradual shift from selling pressure to buying interest. 
• Find the Handle: Once the price returns close to the previous high, investors need to look for a short consolidation or mild pullback. This forms the handle, which is usually moving sideways or slightly downward. This remains smaller in depth compared to the cup. 
• Wait for the Breakout: The pattern is confirmed when the price breaks above the resistance level at the top of the cup with strong trading volume. This breakout signals renewed bullish momentum and is often used by traders as a potential entry point. 

How to Trade in Cup and Handle Pattern 

Entry and exit points for a cup and handle pattern and an inverted cup and handle pattern demand deep knowledge of technical analysis. While entry for both the patterns happens at the breakout point.  

• Entry Point: The entry point for both patterns happens at the breakout point. 
• Stop-Loss: The stop-loss for both should be placed below the handle. For the inverted cup and handle, it should be placed at the high point of the handle. 
• Target: Both patterns are designed such that their target must be at the opposite end of the cup range. For example, if the pattern assumes the form of an up trend and is formed between 90 and 100 for the cup then the corresponding target must be at about 110. If, however, the inverted cup and handle are formed between 100 and 90 then the target in a downtrend must be at about 80. 

Example of Trading in Cup and Handle Pattern 

The table below can help investors understand how the cup and handle pattern forms and how they can plan entries, targets, and stop-loss levels using price data. 

Benefits & Risk of the Cup and Handle Pattern 

The table below shows the benefits and risks of cup and handle pattern breakout.  

Conclusion

The cup and handle pattern is a bullish continuation or reversal price structure frequently utilized to spot purchasing opportunities. Follow price changes on a chart and scan for the "u" shape and the downward handle to identify the cup and handle. Investors can identify a legitimate Cup and Handle pattern by following several guidelines about the underlying asset's length, depth, and liquidity. This pattern creates an "n" shape with an upward handle by moving opposite the cup and handle. Also, managing the Demat account is simple and safe when using a user-friendly platform like BlinkX. Investors may swiftly perform trades and manage their holdings with the BlinkX trading app.