Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose. The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how this product works, and whether you can afford to take the high risk of losing your money. IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority.

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

With forex trading, you don’t own the underlying asset, which means you can go long (buy) or short (sell).

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:

  1. Log in to your IG trading account
  2. Search the market you want to buy or sell in the ‘finder’ panel
  3. Choose your position size
  4. Select ‘buy’ if you think the market will rise, or sell if you think it will fall
  5. 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 practice 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:

  1. Log in to your IG account
  2. Search the market you want to trade in the ‘finder’ panel
  3. Click on the ‘order’ tab
  4. Enter the details of the deal in the order form
  5. 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
  • With derivatives, you can go long or short because you do not own the underlying asset

To start trading, open a live IG account now. If you’re not ready to start straight away, you can practise your trades on a risk-free demo account.

Publication date : 2019-09-30T14:51:24+0100

This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. See our Summary Conflicts Policy, available on our website.

Develop your trading skills

Discover how to trade – or develop your knowledge – with free online courses, webinars and seminars.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading forex provider.

Stay on top of upcoming market-moving events with our customisable economic calendar.