Cup and Handle Pattern TraderLion Feature Image Candlestick Chart

What Is The Cup And Handle Pattern?

Nick Schmidt

Nick Schmidt is a co-founder of TraderLion and Deepvue with over 10 years of market experience. Adopting a “less is more” philosophy, he focuses on weekly charts with an emphasis on price and volume.

December 29, 2019

7 min read

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What is The Cup and Handle Pattern?

The “cup and handle” pattern is one of the most reliable bullish setups in trading. Made popular by William O’Neil in his best selling book How to Make Money in Stocks, this pattern consistently showed up before some of the biggest stock breakouts over the past century. O’Neil’s research proved its effectiveness, revealing that it often signaled major moves in many top-performing stocks.

The pattern starts with a stock pulling back and forming a smooth, rounded “cup.” Then, it consolidates with a smaller, tighter dip called the “handle.” This setup shakes out weak holders and builds a solid base. When the stock breaks out of the handle on strong volume, it sends a high-conviction buy signal. Traders rely on this pattern because it’s a proven roadmap to catching the next big trend.

Cup and handle patterns work on all types of stocks, however, if you want to look for only the highest CANSLIM quality growth stocks, you can easily find them with preset scans on Deepvue. This pattern is most reliable when the stock has good and consistent earnings growth.

Cup and Handle Pattern Rules

Cup and Handle Pattern Infographic TraderLion

The cup should be rounded and resemble a U shape, not a sharp V.
The pattern is formed over a minimum of 7 weeks. (Including Handle)
The handle length is a minimum of 1 week.
The pattern should form above the 200dma.
Base depth should be 12-35%
The handle should ideally slope downwards, not upwards.

Top Cup and Handle Trading Mistakes

When trading using the cup and handle pattern, it’s crucial to avoid common pitfalls to maximize success. Two frequent mistakes are:

Buying During a Loose Handle: A handle that’s too wide and loose signals volatility and uncertainty, which can cause the breakout to fail. A proper handle should have a tight price range with a slight downward drift, showing a solid foundation before the stock moves higher.
Upward-Wedging Handles: If the handle drifts upward instead of downward or sideways, it’s a red flag. This “wedging” pattern shows there’s not enough selling pressure to clear out weak holders, making the breakout less reliable and more likely to fail.
Incorrect Base Positioning: Handles that form in the lower half of the cup or below the 10-week moving average are weak. Strong patterns have handles forming in the upper half, showing that the stock has real strength and is preparing for a breakout.
Ignoring Volume Confirmation: A successful breakout from the handle should come with a surge in volume. For a strong, reliable breakout, volume should increase by at least 40% to 50% above the stock’s average daily volume. Ideally, you want to see even more dramatic volume surges, sometimes up to 200%, 500%, or even 1,000% higher than normal. This indicates that institutional buyers are stepping in aggressively, which provides the momentum needed for the stock to push higher. Without this significant increase in volume, a breakout is more likely to fail because it lacks the buying power to sustain the move.

The Market Psychology of the Cup and Handle Pattern

The “cup and handle” pattern is a clear example of market psychology at work, reflecting the emotions and behaviors of both retail and institutional investors. Here’s how the psychological cycle unfolds:

The Cup Formation – Fear and Accumulation: The pattern begins with a decline as the stock pulls back from a high. This drop often triggers fear and panic selling among weaker hands—traders who bought at the peak or are uncertain about the stock’s long-term outlook. As prices fall, many of these nervous traders cut their losses, leading to a sell-off. Meanwhile, experienced investors, spotting the stock’s fundamental strength, start buying at lower prices, creating support. This accumulation phase forms the rounded “U” shape of the cup, showing that weak holders are shaken out while stronger hands take over.
The Rise Back to the Peak – Returning Confidence: As the stock finds a floor, it gradually begins to climb, reflecting renewed confidence. The initial rise is often cautious, with investors slowly reentering, sensing that the worst is over. As the stock moves closer to its previous high, more traders take notice, building momentum. This steady upward trend completes the cup, indicating a shift back to positive sentiment and growing demand.
The Handle – Final Shakeout of Doubters: Once the stock reaches its previous high, traders who bought during the earlier peak may see this as a chance to break even and sell. This selling pressure creates a brief, shallow dip—the handle. During this phase, the market experiences a final “shakeout,” where any remaining weak holders exit, and speculators looking for quick gains may also sell. This dip is key because it clears out sellers, consolidating the stock at a higher base and forming a solid foundation for a breakout.
The Breakout – Full Commitment and Momentum: When the stock breaks out above the handle on strong volume, it signals a shift from cautious optimism to full-on bullish sentiment. Both retail and institutional investors see the breakout as a sign of strength. Institutions, which may have been quietly accumulating shares during the cup phase, begin buying more aggressively, driving the price higher. This surge in buying propels the stock into a new uptrend, as market psychology shifts to confidence and anticipation of further gains.

The reason this pattern repeats is due to the consistent nature of human psychology in the markets. Fear, hope, and greed drive trading decisions, leading to predictable behaviors. Stocks often go through cycles of accumulation, consolidation, and breakout because investors react similarly to uncertainty, opportunity, and momentum. The “cup and handle” pattern captures this progression, making it a reliable pattern.

Cup and Handle Risk Management

Managing risk efficiently when trading the “cup and handle” pattern requires clear rules to limit losses. One key strategy recommended by William O’Neil is to cut losses at 7-8% below your purchase price. This approach makes sure that even if a trade goes against you, your downside risk is capped, preventing small losses from escalating into bigger setbacks. Another important part of managing risk is choosing the right entry point. Waiting for the stock to break out of the handle on strong volume helps confirm that institutional buyers are behind the upward movement. Without this volume confirmation, breakouts are more likely to fail. Position sizing is also super important. You want to avoid risking more than a small percentage of your capital on any single trade to prevent overexposure, especially if the trade doesn’t go as planned. Keep an eye out for abnormal price action, such as unexpected drops on high volume, which can be a warning signal to exit before losses grow.

Jump to: Learn how to enter the Double Bottom Pattern early.

Cup and Handle Pattern Examples

A chart depicting the cup and handle pattern.

A chart showing the cup and handle pattern on the cboe vs nasdaq.

A chart showing a cup and handle pattern, indicating a bullish trend.

Jump to: How the Volatility Contraction Pattern (VCP) can boost your trading strategy.

Frequently asked questions

The handle represents a short period of consolidation and a final “shakeout” of weak holders. After the stock climbs back to its previous high (forming the cup), some traders may sell, creating a small dip or sideways movement—the handle. This phase is essential because it clears out remaining sellers and sets up the stock for a stronger breakout.

To confirm a cup and handle breakout, watch for a surge in volume as the stock moves above the handle’s resistance level. Ideally, the volume should increase by 40-50% or more above the average daily volume. This indicates that large institutional buyers are entering the market, which helps sustain the upward momentum and reduces the chance of a failed breakout.

To spot a proper cup and handle pattern, look for a rounded “U” shape for the cup, which forms over at least 7 weeks. The handle should last at least 1 week and ideally slope downward, not upward. The pattern must develop above the 200-day moving average, with the cup’s depth between 12-35%. Proper volume spikes during the breakout confirm the pattern’s reliability.

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