Cup and Handle pattern is used as a bullish signal to enter a trade by many active traders. It is perceived as a well-known trading strategy – followed and monitored by market participants – that in many occurrences provide fruitful profits if entered correctly. Cup and Handle, because the security price has traveled its journey in shape that looks like a cup and handle. There are several requirements that need to be met before one can conclude this is a Cup and Handle pattern.
- The cup should be in shape of U, more oval the U is, the stronger signal it represents. The shapes of V are less likely to succeed, such patterns are advised to be avoided.
- Shallow cups are stronger than deep ones – ideally, the depth would be 1/1.25 of the previous advance. Perhaps, it is worth of imagining a vintage English tea cup rather than the modern tall cups bought at a mass retailer.
- Volume should behave as explained in the fundamental concept of “VOLUME“, thus increased volume when price moves in the desired direction.
- Duration or width of the cup should be between 2 weeks and 8 months. It could be longer on weekly charts and on companies with strong fundamentals, for instance, Apple.
- The handle resembles like one on the cup, but in reality, it is a final pullback and final signal of the entire pattern. Typically, the price tracks back up to 30% of the cup. Smaller the handle is, larger the signal and break-out can be.
- Duration of the handle lasts between few days to few weeks, ideally no more than 1 month.
Trading Cup & Handle
- A rational trader is going to enter the trade when the pattern is completely drawn – the price must reach a top of the cup and handle – breaking through the highest level of the resistance.
A trader with higher risk appetite may take the position once downward going handle is broken to the upside direction. However, this may not work out, because even such strategy as this may fail with tragic consequences.
- Profit taking should take place up to 50% of the advance from the bottom of the cup to the breakout. Although, the future price may rise significantly even more than 100% in some cases.
Below is a beautiful example of Cup and Handle. Bata India Ltd. started to drop dramatically in November 2016 until it hit its bottom and in early 2017 the company reclaimed its position until it formed the “Cup”. When taking into account the characteristics, we can conclude the shape is nice and oval, the volume also was increased with price movements to support the theory and duration was simply just perfect for 2-3 months. Once the cup was completed, a disciplined technician could focus development of the handle. It didn’t take too long and within the month a break-out happened. A successful trader would have taken a long position on February 5 or 6 and let stock to build its stairs to heaven. As a result, we can see a significant increase in the price of more than 150%.
Bata India Ltd., Source: Stockcharts.com
Not always this trading strategy works out and thus, one must expect failures of such pattern. When looking at below example of Netgear Inc., the cup formed pretty well with its fundamental characteristics and handle also started fine until it never managed to break via the resistance. That’s why it is essential to wait for it, to be patient and disciplined.
NetGear Inc., Source: Stockcharts.com
Cup and Handle is a useful strategy from which a market participant can certainly profit over a time. However, as others, it should not be used as the only indicator when taking the position.