Cup and handle pattern is a bullish chart pattern. These basic characteristics of cup and handle chart pattern can help you to identify it on time.
Cup and handle pattern, also known as cup with handle formation, is one of the unique, oldest & strongest chart figure in technical analysis. It resembles the shape of a tea cup.
It was originally introduced by William O’Neil. This unique pattern can be found in technical charts of stocks, bonds, commodities and foreign currency markets.
Generally, cup formation can take anywhere from several months to just a few weeks. It usually depends on the time frame you are trading.
In this pattern, handle is the most significant part of formation. It must last within a few weeks. It should not hang too low in comparison to the cup formation.
However, the breakout of this pattern must be accompanied with a huge increase in volume & volatility of the instrument. It is perhaps necessary to make the trade worthwhile. Here are 10 basic guidelines to identify cup and handle pattern in technical charts:
[You can also watch an exciting video on this post from GetUpWise channel on YouTube.]
(1) Prevailing Trend Before The Formation Of Cup And Handle Pattern
It is one of the most common characteristics of cup and handle chart pattern. This unique pattern is actually a bullish continuation pattern where uptrend has paused for a while. But, it can also occur at the end of a bearish trend. Therefore, the pattern can act either act as a reversal or continuation signal.
In an uptrend, the stock should rise by at least 30% from any price point before the formation of cup with handle pattern. In such a trend, this pattern will act as continuation signal of ongoing uptrend.
On the other hand, in a downturn, the stock should fall by at least 30% from any price point before its formation. However, if the prior trend is either near to or far away from any price point then the pattern is more likely to fail.