What it means
A cup and handle is a rounded "U" base (the cup) whose two sides reach about the same level (the rim), followed by a small pullback (the handle) and a breakout above the rim. The inverse version forms at tops.
Why traders use it
The rounded base shows a gradual shift from selling to buying. The handle shakes out weak buyers before the breakout.
Chart examples
Cup and handle
How to identify it objectively
- 1A rounded base, not a sharp V.
- 2Both sides of the cup end near the same price (the rim).
- 3A handle that pulls back less than a third of the cup depth.
- 4Breakout = close above the rim.
Bullish use
- 1Rounded base after a decline.
- 2Small handle near the rim.
- 3Close above the rim: enter, stop below the handle low.
Bearish use
- 1Inverse cup at a top.
- 2Small upward handle.
- 3Close below the rim: enter, stop above the handle high.
What confirms it
- Rim close.
- Shallow handle.
What invalidates it
- Handle drops deep into the cup.
- Close back below the rim after breakout.
How a hypothetical setup is built
Entry
On the close above the rim.
Stop
Below the handle low.
Target
Cup depth projected from the rim.
A hypothetical illustration of how the concept is turned into a plan, not a recommendation. Practise it on a paper account first.
Related concepts
- Chart PatternsBreakout and Retest
- Chart PatternsMeasured Move
- Chart PatternsBull and Bear Flags (and Pennants)
Historical testing
Not tested on The Tradeskill.
Limitations: when it fails
- Takes long to form.
- Rounded versus V shapes are subjective.
- Rim is often equal highs, a liquidity target.
Knowledge check
Pick an answer to see the explanation. Nothing is saved.