The Importance of the Cup and Handle Formation
The Cup and Handle formation, also known as the cup with handle formation, is a bullish chart
pattern identified on a stock chart. It begins with a decline in the stock’s value, followed by a
recovery back to its original level, a minor decline, and then a slight increase in value.
Key Characteristics:
- Trend: A cup and handle formation typically occurs within an uptrend that is relatively
young, ideally lasting a few months. The pattern is less reliable in older uptrends. - Shape: The cup shape should resemble a rounded bowl with a discernible bottom. A V-
shaped bottom is considered less favourable. The depth of the cup is usually shallow,
retracing approximately 30% to 50% of the previous upward move. Ideally, the highs on both
sides of the cup should be roughly equal, though this symmetry is not always perfect. - Duration: The cup formation usually spans 1 to 6 months, while the subsequent handle
formation lasts 1 to 4 weeks. These durations are approximate, as cups can vary from weeks
to years. - Volume: During the cup formation, trading volume tends to decrease as prices decline and
increase as prices recover. In the handle phase, volume typically diminishes and then surges
as the price begins to rise again.
Significance for Traders: The cup and handle formation is interpreted as a bullish signal, often
preceding a substantial upward price movement. Traders estimate the potential price increase by
measuring from the bottom of the cup to the right side. The exact reason for the price rise following
this pattern is not fully understood, but it is believed that the pattern’s recognition by traders
prompts buying activity, contributing to the bullish trend.