This blog post provides a step-by-step guide to trading the cup and handle pattern.
It’s an incredibly versatile chart pattern that can suggest tops or bottoms. Yes, there is an inverted cup and handle that you’ll learn about in this blog post.
Most traders think of it as only a stock pattern. However, it works just as well in forex. The key is knowing what time frame to use and understanding the market context.
I will cover all of that and more in this blog post so that you can level up your trading. If you learn better from videos, I’ve got you covered. Watch the video below for a detailed explanation of how to trade the cup with a handle chart pattern.
Let’s get started.
What is a Cup and Handle Pattern?
Unlike most chart patterns, the cup and handle can represent a continuation or a reversal in the market. It’s more versatile than other chart patterns that suggest a reversal or continuation, but not both.
The cup resembles a rounded bottom, while the handle forms a slight downward consolidation. The consolidation is similar to a descending channel or bullish flag pattern.
Cup: The rounded bottom, typically spanning several weeks or months.
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Handle: A slight downward consolidation that looks like a bull flag and should be relatively small compared to the cup.
Neckline: The trend line connecting the two swing highs within the pattern.
Here’s how it looks on the GBPUSD daily time frame:
Cup and handle pattern on GBPUSD daily time frame with sloped neckline.
The structure above is a continuation cup and handle. However, these patterns can also form after an extended downtrend to signal a bottom, similar to an inverse head and shoulders.
Notice, too, that the neckline slopes downward. The neckline of a cup with a handle pattern can be ascending, descending, or horizontal.
So, how about the psychology behind the pattern? It’s pretty straightforward. The cup portion is consolidation or a pause in momentum. At the same time, the handle is the higher low that fuels the breakout.
Here’s the psychology behind the GBPUSD pattern:
Market psychology behind the cup and handle pattern.
What Time Frames Work Best?
Higher time frames: After over 10 years of trading experience, I’ve found that the cup and handle pattern works best on daily and weekly charts. The same is true for every chart pattern.
There’s more volume in a daily or weekly candle than in a one-hour candle, and volume equals conviction in the forex market.
Think of it this way: In a country with 1 million people, one election has 800,000 voters, while the other has 10,000.
Which election more accurately represents the country’s decision?
The 800,000-voter turnout is a better representation. It’s most of the population, especially compared to the 10,000 voters in the other election.
This is similar to how volume works in the forex market. Every trade is a vote, so the more traders “voting” within a candle, the more reliable the move is likely to be.
Best time frame to trade the cup and handle
The two candles above look identical. But the one on the left is a one-hour candle, and the one on the right is a daily candle.
Since a daily candle contains 24 one-hour candles, it will always have much more volume. And volume equals conviction when trading the forex market.
Lower time frames: While trading the cup and handle on lower time frames is possible, the pattern won’t be as reliable.
Reliability suffers on the lower time frames due to the lack of trades (votes) within those candles. In other words, the lower time frames are prone to false signals.
Pro tip: Confirm a cup and handle Breakout in multiple time frames for the most reliable signals.
Cup and Handle Trading Strategy
Step 1: Move to a higher time frame, like the daily. Look for a rounded bottom followed by a smaller downward correction.
The correction should only cover a small percentage of the cup. This ensures a higher low, which is key to showing strength from buyers.
The neckline can be horizontal, ascending, or descending. However, the second swing high before the handle shouldn’t be aggressively above or below the first swing high.
Cup and handle trading strategy with valid neckline, rounded bottom, and a bull flag handle.
Step 2: Wait for a confirmed breakout. A breakout is at least one daily close above the neckline. However, multiple days or candles above the neckline will give you more confidence in the breakout.
Step 3: Watch for a retest of the neckline to enter the market. This GBPUSD example had a few valid entries.
Ideal entry for the cup and handle is on a retest of the neckline as new support.
At the same time, set your stop loss below the breakout candle.
Stop loss placement for cup and handle pattern goes below the breakout candle.
If the breakout candle is relatively small, you may have to place your stop loss one or two candles before it.
Don’t set your stop loss too tight. It will only lead to a premature stopout. Give the market room to breathe so the trade can work in your favor.
Step 4: Set your targets and manage the trade.
In my over 10 years of trading, I’ve found that multiple targets work best. They offer the best chance of profiting from a trade setup, even if the market doesn’t reach your final target.
Use the market’s price action to your advantage by drawing key levels from obvious swing highs or lows on the high time frames. These become your initial targets.
Former lows become new resistance and a possible target.
Determine the measured objective: A cup and a handle pattern also has a measured objective. It’s the height of the pattern calculated from the neckline breakout.
While measured objectives are not guaranteed, they are an excellent way to determine a chart pattern’s potential.
Measured objective of the cup and handle chart formation.
Inverted Cup and Handle Pattern
This is the bearish version of the pattern. It’s also called the inverse cup and handle or upside-down cup and handle. I think it should be called the “igloo pattern,” but that’s just me.
As you may have guessed, the cup has a rounded top, and the handle slopes upward, similar to a bear flag. The inverted cup and handle indicates a potential bearish reversal or continuation of a downtrend.
Here’s how to trade it:
Step 1: Move to a higher time frame, like before. This time, you’re looking for a rounded top and a slight upward correction.
Step 2: Wait for a confirmed breakdown. That’s at least one daily close below the neckline, preferably several, to increase confidence in the break.
Step 3: Watch for a retest of the neckline. Because this is the inverted version of the formation, you’ll want to sell a retest of the neckline as new resistance.
Don’t forget to set your stop loss. In this case, it will go above the breakdown candle. Because this candle is so large, you could get a little more aggressive and place it lower like this:
Step 4: Set your targets and manage the trade as we did before. Don’t forget to use multiple targets, which will be previous swing lows for an inverse cup and handle.
Lastly, don’t forget to identify the measured objective as a final target.
Upside down cup and handle measured objective, which is the height of the pattern measured from the breakdown point.
In this case, GBPUSD continued sharply lower after reaching the measured objective. Although it was still an incredible trade, you would’ve left a lot of profit on the table had you closed the entire position here.
One way around this is to keep a portion of the position alive after the objective. For example, you could keep 20% of the position open. Just remember to trail your stop loss in case the market has other plans.
Common Mistakes to Avoid
After trading for over 10 years, I’ve made every mistake in the book. That’s great news for you, because it means you can learn from my mistakes.
Here are a few of the most common pitfalls when trading this pattern:
Forcing the Pattern
Not every rounded bottom with a pullback is a valid cup and handle formation. Before trading one, double-check that it meets the criteria described above.
Over time, you will become better at identifying profitable cups and handles. However, you can do a couple of quick checks to ensure you’re only trading the best patterns.
Use higher time frames like we discussed above to filter out the noise and focus on what’s most important.
Don’t go overboard. These chart patterns don’t occur often on the high time frames, so draw them sparingly.
Avoid a strong bias when analyzing a new chart. Let the market dictate a bias via the chart patterns rather than a preconceived notion of what’s supposed to happen.
Ignoring Velocity
The velocity of the Breakout is critical to the success of the pattern. If a market doesn’t break out aggressively, it’s prone to failing.
It’s also essential that you watch the price action as the market breaks out and retests the level. Knowing that big buyers are on board and defending the neckline as new support will give you more confidence.
If the price action is sluggish after the break, it may indicate that big buyers or sellers are not on board.
Overlooking Market Context
A valid cup and handle chart should align with market conditions. That’s true for every chart pattern that is worth your time.
For instance, a continuation cup and handle should form within an established uptrend, while a reversal cup and handle should occur after an extended uptrend.
Understanding market conditions surrounding the chart pattern will help you decide if it’s a valid structure.
Setting a Tight Stop Loss
You may be tempted to trade with a tight stop loss to increase your position size. I’m certainly not judging you because I was right where you are now at one time in my career.
Experience has taught me to reduce my position size and increase my stop loss distance. This is the best way to ensure that you aren’t stopped prematurely.
Giving the trade room to breathe is especially important during volatile periods. So do yourself a favor and focus on giving the market plenty of room to breathe, not maxing out
your position size.
Frequently Asked Questions
What is a cup and handle pattern?
Depending on the market context, a cup and handle can be a bullish continuation pattern or a reversal formation. There’s also a bearish version called the inverted cup and handle.
Is a cup and handle bullish?
Yes, depending on where it forms, it’s either a bullish continuation pattern or a bullish reversal. However, the inverse (or upside-down) cup with handle pattern is a bearish formation.
What is an inverse (inverted) cup and handle?
It’s an upside-down cup and handle, making it a bearish reversal or continuation pattern, depending on the context.
What is the best time frame to trade the cup and handle?
The higher time frames, like the daily and weekly, are best. That’s because there’s more volume in each candle, and volume equals conviction when trading the forex market.
How do you trade the cup and handle formation?
Move to a higher time frame (daily or higher). 2. Wait for a confirmed break above the neckline. 3. Watch for a retest of the neckline as new support. 4. Set your targets at previous swing highs, and don’t forget to calculate the measured objective.
Can it work in the forex market?
Yes, the cup with handle pattern can work in the forex market.
How do you trade the cup handle breakout?
The first step is to wait for a sustained break above the neckline. Ideally, you want to wait for a retest of the neckline as new support before entering the market. From there, set your stop loss at least 1-2 candles back, have multiple targets based on prominent swing highs, and calculate your measured objective.
How do you calculate a cup with a handle measured objective?
Take the height of the pattern. Then, measure the same distance from the neckline breakout. That’s your measured objective