Chart patterns like a triangle, flag, pennant, wedge, rectangle, head and shoulders, and cup and handle occur when the price of the underlying asset moves in a way that resembles these common shapes.
These kinds of price patterns help traders to have a logical entry point, a stop loss location and price target to manage the risk reward ratio of a trade.
The Cup and Handle pattern on a price chart looks visually as a cup with a handle.
This cup with a handle price pattern has been made famous by american technician William J. O’Neil.
Cup can be seen in the shape of a “U” and the handle as a slight downward drift. You will get this pattern in a one-minute chart, and in large time frames, like daily, weekly and monthly time frames.
Cup with a handle price pattern is a bullish signal for technical analysts. They try to get an entry for a long position once the upper resistance line of the consolidation area (Handle) breaks to the upside.
Stop loss can be placed below the handle or consolidation level depending on the risk tolerance level of the trader.
Here are the four stages of a cup and handle price pattern;
- Underlying security posts a significant high in an uptrend.
- Price retraces no deeper than the 50% of the prior trend. During the pullback, it consolidates to create a U-shape or the “cup” in the “cup and handle”.
- Price reached the prior high but failed to break that level. Price consolidates for a while within a channel, which becomes the handle.
- After consolidation, the underlying security reaches the resistance level of the handle and breaks out to move higher.
To know more about cup and handle pattern, we recommend you to read “How to make money in stocks” written by William J. O’Neil.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
