The cup and handle is a bullish pattern made famous by the American investor William O'Neil. The price forms a rounded bowl (the cup), drifts a little lower for a short time (the handle), and then breaks out above the rim. It often shows up in strong shares before a big move higher.
What a cup and handle looks like
The cup is a U-shaped base: a fall, a gentle rounded bottom and a climb back up to near the old high. A rounded U is better than a sharp V, because it shows the selling has been soaked up slowly.
The handle is a short, shallow pullback near the right-hand rim of the cup. It shakes out the last nervous holders before the price breaks out. The buy signal comes when the price closes above the top of the handle, which is also roughly the rim of the cup.
This pattern is like a rounded bottom with an extra dip at the end.
What makes a good one
- A clear uptrend before the cup forms. The cup is a pause, not the start of a recovery from a crash.
- A cup that is not too deep. A fall of about 12% to 35% from the rim is typical for shares.
- A handle that forms in the upper half of the cup and pulls back no more than about a third of the cup's depth.
- A handle that lasts days or a few weeks, not months.
- Volume that dries up in the handle and jumps on the breakout.
How to trade the cup and handle
- Entry: buy on a close above the top of the handle.
- Stop: below the low of the handle.
- Target: measure the depth of the cup, from the rim down to the bottom, and add it to the breakout price. A cup that is 20 points deep and breaks out at 100 points to about 120.
Mistakes to avoid
- Buying in the handle before the breakout.
- Accepting a handle that falls into the bottom half of the cup. That is a sign of weakness, not a shake-out.
- Ignoring the wider market. Most shares follow the market, and breakouts in a falling market fail more often.
Related guides
This guide is for education only and is not financial advice. Trading carries risk; you can lose more than you expect.