The cup and handle pattern is one of the more bullish technical signals that traders commonly look for. As the name suggests, the pattern resembles a cup and a handle; it’s comprised of a U-shaped cup followed by a handle that is denoted by a modestly downwardly sloping trendline.
Traders looking for technical signals view the cup and handle as a bullish continuation pattern. Understanding the cup and handle could therefore help you hit that buy button with greater success.
Early in the cup pattern the asset is testing a prior resistance level and so attracts some selling pressure. At this point, investors are typically selling the asset to lock in trading profits from the recent spike in the price.
Others may be selling to break even as they may have bought the asset at this higher level previously.
The price consolidates, heading towards the bottom point of the U curve due to selling pressure. However, this proves a temporary phenomenon as buyers enter the market to take advantage of the lower prices. In fact, the buyers soon win the tug of war with the sellers and the price moves back up again, forming the upward phase of the U curve.
Trading volumes should decline at the bottom of the cup and rise again when the price is on the up in this second phase.
In the subsequent handle period, there is more profit taking once again. Traders tend to view a breakout from this handle phase as a buy signal. Crucially, the handle phase is characterised by lower trading volumes, while the breakout itself should be denoted by higher trading volumes to represent a valid buying signal.
The further the distance that the top of the handle is away from the prior highs, the greater the breakout must be.
A typical trading strategy using the cup and handle is to place a buy order just above the trendline of the handle phase. However, we could also wait for the asset price to close above the trendline.