What is a Cup and Handle pattern?

A Cup and Handle is a chart formation which serves as a technical indicator used by investors and traders to identify a potential trading opportunity. It is one of the easiest chart patterns to identify. You can spot the pattern by looking for two main parts: the cup and the handle. The cup appears as "U" shape and the handle has a slight drift to downside, similar to “\”. (see the example below).




One more thing to keep an eye on when identifying Cup and Handle is volume of the pattern. Volume generally increases as the stock moves back toward its old high and decreases as the prices decline.

So, how do you trade this pattern? Investors should place a stop buy order slightly above the upper trend line of the handle. The great thing with a stop buy order is your entry will be above the highs of the “handle”, and if the breakout is real, that’s one of the best prices to trade. If one uses an aggressive entry before the price leaves the handle part of the pattern, a false break out may occur and a loss will be recorded.

 

Thus, the safest way is to  wait for the price to close above the upper trend line of the handle. The stop loss should be placed within the handle, so it is activated if the price returns inside. A take profit depends on the risk-management of a trader.