Cup and handle chart pattern explained
Knowing how to read and interpret charts is one of the most important aspects of trading. We explore the cup and handle pattern, as well as the inverted cup and handle, and show you how to trade when you recognise these patterns.
What is a ‘cup and handle’?
A ‘cup and handle’ is a chart pattern that can help you predict future price movements. It gets its name from the tea cup shape of the pattern. It is considered one of the key signs of bullish continuation, often used to identify buying opportunities.
The cup and handle chart pattern does have a few limitations. Firstly, it does not occur within a specific timeframe. Sometimes it forms within a few days, but it can take up to a year for the pattern to fully form. Secondly, you need to learn to identify the length and depth of a true cup and handle, as there can be false signals. The longer and rounder the bottom, the stronger the signal. However, the cup should not be ‘v’ shaped or too deep. Lastly, illiquidity also restricts the cup and handle from fully forming as trading volume also affects an asset’s price.
Remember that you should always use your knowledge and risk appetite to decide if you are going to trade based on ‘buy’ or ‘sell’ signals.
How to identify the cup and handle pattern
To identify the cup and handle pattern, start by following the price movements on a chart. The pattern starts to form when there is a sharp downward price movement over a short time. This is followed by a period where the price remains relatively stable. Then, there is a rally that is more or less equal to the initial decline. These movements form a ‘u’ shape on the chart – this is known as the cup.
Once the price has reached the top of the cup, it starts moving sideways or slightly downwards to form the handle. If the handle drops below the lower half of the cup, it is no longer a ‘cup and handle’ pattern. In most cases, the handle should not dip below the top third of the cup for it to be a cup and handle pattern.
What is an ‘inverted cup and handle’?
An ‘inverted cup and handle’ is a chart pattern that indicates bearish continuation, triggering a sell signal. Think of it as an upside-down cup and handle.
If you look at the regular cup and handle pattern, there is a distinct ‘u’ shape and downward handle, which is followed by a bullish continuation. This means the inverted cup and handle is the opposite of the regular cup and handle. Instead of a ‘u’ shape, it forms an ‘n’ shape, with the handle bending slightly upwards on the chart.
How to trade when you see the cup and handle pattern
This is useful when trading both the cup and handle and the inverted cup and handle, because you can speculate on upward or downward price movements.
To trade the cup and handle pattern and take advantage of these price movements, follow these steps:
- Log in to your IG trading account
- Search the market you want to buy or sell in the ‘finder’ panel
- Choose your position size
- Select ‘buy’ if you think the market will rise, or sell if you think it will fall
- Confirm the trade
If you’re not ready to take on the live markets, you can open a risk-free demo account to identify the cup and handle pattern and practise your trades.
You could also place an order above or below the handle to buy or sell when the asset reaches a more favourable price. An order allows you to open a position at a price you choose, rather than the one currently being quoted.
Follow these easy steps to place an order:
- Log in to your IG account
- Search the market you want to trade in the ‘finder’ panel
- Click on the ‘order’ tab
- Enter the details of the deal in the order form
- Confirm the order
Cup and handle summed up
- The cup and handle pattern is considered one of the key signs of bullish continuation, often used to identify buying opportunities
- To identify the cup and handle, follow price movements on a chart and look out for the ‘u’ shape and the downward handle
- There are some limitations of the cup and handle pattern, relating to its timeframe, length, depth and the underlying asset’s liquidity
- An inverted cup and handle is used to identify selling opportunities, as it is a sign of bearish continuation
- The inverted cup and handle moves in the opposite direction as a cup and handle, forming an ‘n’ shape and an upward handle
- You can trade the cup and handle (or inverted cup and handle) using derivatives such as CFDs
- With derivatives, you can go long or short because you do not own the underlying asset
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