A cup and handle is a bullish pattern which can appear on a candlestick chart. The formation of a cup and handle can vary in duration but is typically anywhere between 7 weeks and 50 weeks. To explain how to recognise a cup and handle and how to trade one, we’re going to assume that you already know and understand how to read a candlestick chart.
What does a Cup and Handle look like?
A cup and handle pattern is formed when a previous downtrend gradually becomes an uptrend, creating a “U” shape on the chart. This curve is the cup part of the formation which can incur some selling pressure from investors who bought at the beginning of the formation of the cup. This selloff causes a slight downward drift, also known as the handle. The cup (or “U” shape) can vary in length and can either be a smooth curve or a sharp “V” shaped bottom. It is widely accepted that a smoother curve is a more reliable signal and that trading on a sharp “V” should typically be avoided. The downward movement forming the handle shouldn’t be overly steep and should stay within the top half of the cup. A steep handle should ideally be avoided.
What does a Cup and Handle signify?
When we recognise a cup and handle pattern, we can expect a breakout above the handle to be followed by a fairly aggressive pump. To work out how much the price will increase, we should measure the distance between the bottom of the cup and the breakout point on the handle. The upward movement following the cup and handle typically mirrors this distance. As always, it’s important to pay attention to past occurrences of these patterns and to trade with caution. After saying that, a cup and handle is a reliable signal which often plays out as expected. If the right-hand-side of the cup is very steep, it can also sometimes resemble a bull flag, which further adds to the bullishness of the signal.
Cup and Handle patterns are considered reliable bullish indicators, particularly on longer timeframes. The signal has been recognised and used in stock market trading since the 1980s and has proven to be very successful among crypto trading. The strategy with the lowest risk when trading a cup and handle is to place a buy order slightly above the upper line of the handle. This ensures that we’re not pulled into a trade based on a false breakout. If the price experiences further slippage, we should be safe if we don’t jump in too early. To further minimise risk, it’s always worth using a DCA (or dollar cost average) to get a lower overall entry.
Like with all technical analysis, it’s advisable to learn about all patterns, signals and indicators and use them in conjunction with one another. Trade carefully and at low risk by coupling a cup and handle with another bullish signal.