Cup with Handle Patterns: Overview and How to Trade

What are cup with handle patterns?

Cup with handle patterns are bullish continuation patterns consisting of an initial large trough (the cup) followed by a smaller trough (the handle) once prices reach a resistance level.

During an upward trend, prices draw an initial high point before pulling back. Then, the uptrend resumes, but this new attempt loses steam at the same level as the previous uptrend. Again, prices plunge, forming a second high point at the same level.

However, the uptrend is blocked at the resistance level, indicating that prices are now more favorable to sellers than buyers. The trough between these first two high points forms the “cup.”

After prices fail to cross the resistance level for a second time, they pull back again but rebound to reach the resistance level more quickly. This second smaller trough forms the “handle.”

The pattern and its bullish signal are validated when prices cross the resistance level on the third attempt, which completes the formation of the cup and its handle.

The theoretical price target of the increase is then determined by calculating the distance from the top of the cup to its bottom and adding that distance above the resistance level.

On the other hand, the pattern and its signal are invalidated if, after crossing the resistance level, prices trend downward again below the low point (the bottom) of the “handle.”

This pattern was popularized by William J. O’Neil, the founder of Investor’s Business Daily and the creator of the CAN SLIM investment strategy.

How to identify cup with handle patterns

Features	Explanations
Prior upward trend	Before cup with handle patterns form, prices trend upward with increasingly higher highs and lower lows.
Resistance level	The price fails to increase three times, meaning the price fails to cross the resistance level three times.
Cup	The trough formed between the first two high points represents the “cup.”
Handle	The trough formed following the second high point represents the “handle” of the cup.
Time scale	The cup with handle pattern can take place on any time scale. The duration of the cup and its handle can be a few minutes or weeks, depending on the trading horizon.
Volume	Traders often look for increased trading volume once prices reach the resistance level and then again when prices cross the resistance level.

Steps for spotting cup with handle patterns:

1 – Identify a prior upward trend.

2 – Note the formation of two high points at the same level.

3 – After the second high point, note the formation of a trough (the handle) smaller than the first trough (the cup).

4 – After the handle is formed, note that prices cross the resistance level. This confirms that you have a cup with handle pattern and its buy signal.

How to trade cup with handle patterns

Traders usually bet that prices will continue to rise once they cross the resistance level. A stop-loss order is placed below the handle, and a take-profit order is placed above the resistance level at a distance equal to the depth of the cup.

Position	Buy
Entry point	After crossing the resistance level
Stop-loss	Below the handle
Take-Profit	Above the resistance level at a distance equal to the distance between the bottom of the cup and the resistance level

Example of a cup with handle pattern

In this example, HERMES share price draws a cup with a handle. 

The first trough (in black) is the cup. Smaller in size, the second trough is the handle (in blue). After the cup with handle pattern forms, the upward trend accelerates after crossing the horizontal resistance level (in red).

What happens after these cup with handle patterns?

Cup with handle patterns are not certain, and their presence alone is insufficient to provide traders with a significant statistical advantage. Therefore, cup with handle patterns should be interpreted more broadly.

Furthermore, the accuracy of cup with handle patterns is often imperfect. In fact, it is common to see the second high point slightly higher or lower than the first because of market noise.

Inverted cup and handle vs cup with handle: What’s the difference?

Inverted cup and handle patterns are the exact opposite of cup with handle patterns. 

In other words, inverted cup and handle patterns are bearish continuation patterns that consist of an initial large peak (the cup) followed by a smaller peak (the handle) once they reach a support level.

While the cup with handle pattern sends an up trending buy signal, the inverted cup and handle pattern sends a down trending sell signal. 

Cup with handle patterns are rarely perfectly geometric. Therefore, it can take a little time and practice to be able to identify them. 

Consider using one of the best trading simulators to teach yourself to trade cup with handle patterns with no risk.