Last Updated on: 9th February 2021, 08:20 pm
Chart patterns form when the price of an asset moves in a way that resembles a common shape, like a rectangle, flag, pennant, head, and shoulders, or, like in this example, a cup and handle.
There are two parts to this chart pattern:
- The cup
- The handle
As the cup is completed, price trades sideways, and a trading range is established on the right-hand side and the handle is formed.
A breakout from the handle’s trading range signals a continuation of the previous uptrend.
How to Trade the Cup and Handle Chart Pattern
The cup should resemble a bowl or rounding bottom. The perfect pattern would have equal highs on both sides of the cup, but in the real world, perfect doesn’t exist.
After the high forms on the right side of the cup, there is a pullback that forms the handle. The handle is the consolidation before the breakout.
The handle needs to be smaller than the cup. The handle should not drop into the lower half of the cup, and ideally, it should stay in the upper third.
The buy point occurs when the asset breaks out or moves upward through the old point of resistance (right side of the cup). This breakout should occur with increased volume.
The price target following the breakout can be estimated by measuring the distance from the right top of the cup to the bottom of the cup and adding that number to the buy point.
Vincent Nyagaka is a Professional Trader, Analyst & Author. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Check out Vincent’s Professional Trading Course here.