Lesson 7 of 9
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Cup and handle (10)

Phillip Konchar

Cup and handle

The cup and handle is a bullish continuation pattern. This occurs when an upwards trend has paused but continues after the pattern has been confirmed. These patterns are really long in duration – when trading in a daily timeframe it can take between two and six months to form.

The uptrend hits resistance, and a long drawn out cup shape forms, returning to the resistance. It creates a U shape. If there is a sharp V shape then it isn’t a cup and handle pattern. Spotting a U or a V is subjective so every trader may have a different idea in mind when using the cup and handle patterns. The handle forms after the cup when the resistance level is found again, this might look similar to a flag or pennant. The shallower the handle, relative to the cup depth, the more explosive we’d expect the breakout.

This pattern confirms when the price breaks out above resistance.

Trading the cup and handle

After confirmation a trader might set their take profits and stop losses as follows:

  • Price target: the price target is set by projecting the height of the cup, from the right-hand side, up above the breakout.
  • Aggressive stop loss: below the handle’s resistance level.
  • Conservative stop loss: below the handle’s support level.

Let’s show you a cup and handle in EURUSD in an hourly timeframe. There is a bullish trend into the pattern, its got an OK duration, a U shape forms, a flag develops after resistance is established and there is an explosive move through the resistance of the flag and the cup in one period. The price retraces and does not find support at the old resistance line – the retracement would have triggered the aggressive stop but not the conservative stop. At the time of writing this is still playing out, so we don’t know if the take profit target was achieved or the price retraced and triggered the stop.

Key Learning Points
  • The cup and handle is a bullish continuation pattern.
  • The pattern must form a U shape, a V shape would be considered too sharp of a reversal.
  • The confirmation comes when the price breakout above the cup’s resistance.
  • Take profits are set by taking the depth of the cup and projecting it up from the breakout.
  • Stop losses can be set in two places, the aggressive one just under the handle’s resistance, the conservative one under the handle’s support.

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