Pattern Trading | Cup & Handle Pattern Strategy
A cup and handle pattern occurs when the underlying asset forms a chart that resembles a cup in the shape of a U, and a handle represented by a slight downward trend after the cup.
The shape is formed when there’s a price wave down, which is then followed by a stabilization period, followed again by a rally of approximately the same size as the prior trend. This price action is what forms the identifying cup and handle shape.
The formation is usually initiated by low-trading volume , followed by high-volume as the left lip forms, then falling volume near the bottom of the cup, which then kicks off to rising volume towards the right lip and on the breakout. This process can last anywhere from a few minutes to sixty-five weeks, initiated by a downward price fluctuation followed by a period of stabilization, then a rally that brings the prices back up almost or equal to the previous level before the plummet.
Once this happens, the the cup advances and forms a U, and the price drifts downward slightly forming the handle.
The handle has to be smaller than the cup and should only indicate a slight downward trend within the trading range – not one that goes lower than one-third of the way into the cup.
To trade this formation correctly, a trader should place a stop buy order slightly above the upper trendline that makes up the handle. This way, the buy order will only execute if the price breaks above the upper resistance level . This will avoid jumping into a cup and handle pattern too early by entering a false breakout. For traders who want to add a little more certainty to their trade, they should wait for the price to close above the upper trendline of the handle.
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