Cup and Handle formation, or the Cup with Handle formation, is a bullish continuation chart pattern. The formation was discovered by William O'Neil and introduced in his 1988 book 'How to make Money in Stock'. Cup and handle formation is very popular among investors, and that is one reason for the success of the pattern; because traders buy in high volumes creating the bullish breakout at the end of the formation.


The requirements of cup and handle formation include,

• The pattern should form after a not too mature (2 or 3 months old) strong bullish trend. The pattern weakens when formed after matured uptrends, as the upside potential is low.
• The pattern must have two components, the U-shaped Cup and a handle. The handle must always follow the cup.
• The cup is like a semi-circle and is formed as a result of (steady) price decline followed by flattening of trend and then a (steady) price increase.
• The handle is a downtrend after the formation of the cup.
• The end of the handle formation is marked by increased buying volume resulting in a sharp upside breakout.

The shape and duration of the cup formation is important. V-shaped cups, formed because of sharp decrease and then sharp increase of the price, are not considered valid. The more rounded the formation, the better reliable it is. The cup formation lasts for a few weeks or months; the ideal one extends from 2 to 6 months. The depth of the cup should be below 30 to 50 percentage of the prior trend; depths above 65% are considered less reliable. In an ideal cup formation, both sides have equal highs. The handle formation lasts 1 to 4 weeks and the depth should be below 30% of the cup formation.

Many traders enter the trade when the breakout after handle formation crosses the descending trendline (drawn connecting the highs of the handle). Many other traders wait till the breakout crosses the two peaks of the cup formation. With cup and handle formation the confirmation of breakout, in the form of sharp increase in trading volume, is essential.

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