Explore CFDs in depth | ThinkMarkets

Academy Technical analysis

Articles (20)

All

Beginners

Experienced

Trading Cup and Handle Patterns in Forex Markets

<p>Trading Cup and Handle patterns requires forex traders to understand specific nuances and effectively separate high-probability setups from low-probability setups. Thomas Bulkowski showed in his extensive study of the bullish continuation pattern that the difference between profitable and losing trades lies in the execution of a Cup and Handle trading strategy.</p>   <p>Bulkowski confirmed a staggering 95% success rate in Cup and Handle trading when applying particular technical analysis criteria during bullish trends. Yet, he also proved that to achieve high success rates, traders must master tested entry and exit rules.</p>   <p>Building on the <a href="/en/trading-academy/technical-analysis/cup-and-handle-pattern-for-forex-trading/">Cup and Handle chart pattern recognition</a> fundamentals covered in our previous guide, this strategy-focused article will shed some light on practical trading approaches by exploring:</p>   <ul> <li>Criteria for identifying the strongest Cup and Handle formations</li> <li>Volume analysis techniques that validate pattern strength</li> <li>Specific entry signals, stop placement methods, and target-setting approaches</li> <li>Position sizing formulas calibrated for Cup and Handle trades</li> <li>A Cup and Handle strategy example with real market application</li> <li>Adjustments for trading the pattern across forex market environments</li> </ul>   <p>By the end of this article, traders should possess a complete Cup and Handle trading strategy ready for immediate application in the forex markets.</p> <h2>Why Trade Cup and Handles in Forex</h2> <p>The Cup and Handle trading pattern offers forex traders specific advantages when applied to the 24/5 market environment. Its characteristics align well with currency trading dynamics for four main reasons:</p>   <ol> <li>Aligns with forex market dynamics</li> <li>Presents clear trading levels to trade of</li> <li>Used in many periods, trading styles</li> <li>Its success is verified by backtests</li> </ol>   <p>Let’s dive into each one of these reasons individually and evaluate how these reasons can specifically benefit traders:</p> <h3>Cup Pattern Aligns with Forex Market Technical Analysis</h3> <p>The forex market creates distinguishable breakout patterns 24/5, making Cup and Handle technical analysis more relevant:</p>   <ul> <li>The consolidating nature of the Cup & Handle pattern fits well with the volatility cycles witnessed during each forex session</li> <li>Major forex pairs create smoother, more reliable U-shaped cups than the stock markets that Bulkowski analysed</li> <li>Currency trends tend to last longer due to macroeconomic factors, which can extend trend continuations following Cup and Handle pattern breakouts</li> </ul> <h3>Trading Pattern Forms Clear Risk Management Points</h3> <p>The bullish continuation pattern offers clear technical levels for trade management in a market where risk control is essential:</p>   <ul> <li><strong>Cup and Handle Pattern Entry:</strong> Clear Cup and Handle breakout points minimise subjectivity</li> <li><strong>Cup and Handle Stop-Loss:</strong> Defined points below the handle or cup structure provide protection during overnight gaps</li> <li><strong>Cup and Handle Take-Profit:</strong> Objective measurement techniques create realistic Cup and Handle pattern targets</li> </ul> <h3>Traders Use Multiple Cup and Handle Pattern Time Frames</h3> <p>Unlike many breakout patterns that work only on specific timeframes, the Cup and Handle suits various forex trading styles:</p>   <ul> <li><a href="/en/trading-academy/forex/day-trade/">Intraday:</a> Forms effectively on 15-minute to 1-hour charts for day traders</li> <li><strong>Swing:</strong> 4-hour chart formations provide multi-day opportunities</li> <li><strong>Position:</strong> Daily and weekly patterns signal major trend resumptions for longer-term forex positioning</li> </ul>   <p>However, note that Bulkowski did not study patterns that take less than 7 weeks to form.</p> <h3>Cup and Handle Chart Patterns Are Backtested</h3> <p>When adapted for currency markets, the bullish pattern and the inverse Cup and Handle variation can maintain a strong statistical performance:</p>   <ul> <li>Performance backtests suggest higher success rates on major pairs than crosses or exotics</li> <li>Pattern may perform best during specific forex sessions (London and London-NY overlap)</li> <li>Volume confirmation techniques can be adapted for the decentralised forex market</li> </ul>   <p>By understanding the main reasons for trading the Cup and Handle chart pattern, traders can move beyond pattern recognition and deploy a contextually appropriate identification framework for forex. We did lay out the complete stages of the Cup and Handle formation in our first article, but here we go into specific characteristics and how trading volume can help spot the best formations.</p> <h2>How to Find the Best Cup and Handle Setups in Forex Trading</h2> <p>Transforming the pattern recognition process we laid out in our first article into a trading Cup and Handle strategy requires a systematic approach for filtering the right setups. Based on extensive pattern research and forex trading dynamics, the following 3-prong framework helps identify the highest-probability trading opportunities:</p> <h3>1. Cup with Handle Pattern Quality Classification</h3> <p>Not all Cup and Handle chart patterns are created equal. To focus only on the most promising setups, one must evaluate the Cup and the Handle separately.</p> <h4>A) Cup Formation Quality</h4> <p><img alt="Best Trading Cup and Handle Pattern, Cup Formation (ThinkMarkets)" src="/getmedia/b1684cce-b222-43de-8731-e5b11e83dc2e/Academy-Tech-analysis-Cup-and-Handle-T-Optimal-Cup-Formation-Characteristics.png" /></p>   <p style="text-align: center;">Optimal Cup Formation Characteristics</p>   <p><img alt="Best Trading Cup and Handle Pattern, Handle Formation (ThinkMarkets)" src="/getmedia/db3bc99b-2172-4829-8d33-68b2c5ba607f/Academy-Tech-analysis-Cup-and-Handle-T-Optimal-Handle-Formation-Characteristics.png" /></p>   <p style="text-align: center;">Optimal Handle Formation Characteristics</p> <h3>2. Cup and Handle Volume Analysis</h3> <p>While gaining proper trading volume data in forex is challenging (given the market's decentralised nature), traders must perform the best analysis possible when validating the Cup and Handle chart pattern through the different formation stages we covered in our introductory article.</p> <h4>Volume During Stage 1: Formation of the Pre-Cup High</h4> <p><strong>Uptrend Volume:</strong> Look for increasing trading volume during the late uptrend before the left cup lip forms</p>   <p><strong>Distribution Warning:</strong> Volume that peaks before price reaches its high (volume price divergence) may indicate deeper correction ahead</p>   <p><strong>Forex Tip:</strong> In forex markets, focus on patterns where trading volume expands during the later stages of the uptrend, confirming institutional participation</p> <h4>Volume During Stage 2: Formation of the Cup</h4> <p><strong>Ideal Pattern:</strong> U-shaped volume that decreases into the cup bottom and gradually increases during recovery</p>   <p><strong>Entry Filter:</strong> The Cup bottom should coincide with the minimum volume levels</p>   <p><strong>Warning Signs:</strong> Random trading volume spikes during cup formation often precede failed patterns</p>   <p><strong>Statistical Tip:</strong> Bulkowski's research shows cups with U-shaped volume patterns outperform all other volume configurations</p> <h4>Volume During Stage 3: Formation of the Handle</h4> <p><strong>Optimal Behaviour:</strong> The handle volume should be below the cup's average volume</p>   <p><strong>Warning Sign:</strong> Lower handle volume correlates with reduced volatility during breakouts</p>   <p><strong>Failure Warning:</strong> Handle volume exceeding cup volume indicates potential premature accumulation</p>   <p><strong>Position Sizing:</strong> May scale in when the handle shows textbook volume contraction</p> <h4>Volume During Stage 4: Price Breakout</h4> <p><strong>Entry Trigger:</strong> Light trading volume performs better during bullish Cup and Handle pattern breakouts, but requires an increase above the resistance; heavy volume is best in bear markets</p>   <p><strong>False Breakout Tip:</strong> Apply a 2-bar confirmation rule (breakout bar plus following candle)</p> <p><img alt="Cup and Handle Volume (ThinkMarkets)" src="/getmedia/437e6adf-bc37-4645-9422-c1b2537a6340/Academy-Tech-analysis-Cup-and-Handle-T-Volume-Forms-a-U-Shaped-Pattern.png" /></p>   <p style="text-align: center;">Cup and Handle Volume Forms a U-Shaped Pattern</p> <h3>3. Forex Trading Considerations</h3> <p>The structure of the forex market requires specific adaptations to the Cup and Handle strategy. We did cover in-depth how to use the Cup and Handle formation in the forex market in our first article, though the following considerations build more on the application side of things:</p> <h4>Session Considerations</h4> <p><strong>Optimal Breakouts:</strong> Prioritise patterns that complete during London or London-NY overlap sessions, as they carry more liquidity</p>   <p><strong>Higher Failure Rate:</strong> Be cautious of Asian session Cup and Handle pattern breakouts</p>   <p><strong>Volume Quality:</strong> Apply stricter volume criteria during major sessions; more flexible during thinner periods, if you can take more risk</p> <h4>Currency Pair Selection</h4> <p><strong>Best Performance:</strong> Major pairs (EUR/USD, GBP/USD, USD/JPY) show cleaner Cup and Handle formations</p>   <p><strong>Secondary Choices:</strong> European crosses with sufficient liquidity (EUR/GBP, EUR/CHF)</p>   <p><strong>Avoid:</strong> Exotic pairs where reliability decreases significantly</p> <h4>Economic Calendar Integration</h4> <p><strong>Pre-Event Warning:</strong> Avoid new entries 24 hours before high-impact events affecting relevant currencies</p>   <p><strong>Position Adjustment:</strong> Consider reducing size when holding through major announcements</p>   <p><strong>Stop Management:</strong> Consider widening stops when holding through medium/high-impact news events</p>   <p>Once you have identified a high-quality pattern and considered the intricacies of the forex market, the next stage is systematic trade execution.</p> <h2>A Framework for Trading the Cup and Handle</h2> <p>The following trading framework outlines specific rules for entering, managing, and exiting Cup and Handle trades in the forex market.</p> <h3>Entry</h3> <h4>Bullish Entry Techniques</h4> <p>Unlike basic "buy the breakout" approaches, skilled forex traders implement specific entry strategies based on pattern characteristics and market conditions, as well as their risk appetite.</p> <p><img alt="How to Trade Cup and Handles (ThinkMarkets)" src="/getmedia/6bcaf5e2-5d34-47f5-931e-0bafe744bc48/Academy-Tech-analysis-Cup-and-Handle-T-Trading-Entry-Methods.png" /></p>   <p style="text-align: center;">Cup and Handle Trading Entry Methods</p> <h4>Confirmation Techniques</h4> <p>For the highest probability entries, look for additional validation beyond price breaking resistance:</p>   <ul> <li><strong>Volume Confirmation:</strong> Always require a minimum increase in volume compared to the pattern average</li> <li><a href="/en/trading-academy/forex/using-candlestick-patterns-in-forex-day-trading/">Candlestick Patterns</a>: Look for <a href="/en/trading-academy/technical-analysis/using-double-candlestick-patterns-in-day-trading/">bullish engulfing</a>, <a href="/en/trading-academy/technical-analysis/single-candlestick-patterns-a-guide-for-day-trading/">bullish marubozu</a>, or <a href="/en/trading-academy/technical-analysis/guide-to-day-trading-triple-candlestick-patterns/">three white soldiers</a> at the breakout level</li> <li><strong>RSI Validation:</strong> RSI above 50 with upward momentum adds conviction</li> <li><strong>Consolidation Break:</strong> Enter only after at least 2-3 candles of handle consolidation</li> </ul> <h3>Stop-Loss</h3> <p>A thorough approach to risk management begins with strategically placed stops based on pattern structure:</p>   <ul> <li><strong>Handle-Based Stop:</strong> 10-20 pips below the lowest point of the handle</li> <li><strong>Fibonacci Approach:</strong> Below 38.2% (~ 50%) Fibonacci retracement of the depth of the cup when it has a clear, well-defined bottom</li> <li><strong>Volatility-Adjusted:</strong> 1.5× of the 20-period ATR below handle low for major pairs, 2.5× ATR for crosses or during volatile market conditions</li> <li><strong>Support-Based Stop:</strong> Just below the nearest support level under the handle when trading on higher timeframes (4H+)</li> </ul> <h3>Position Size</h3> <p>The classic forex position sizing formula should be adjusted based on pattern quality:</p>   <p>Lot Size = (account size x risk percentage) / (stop in pips x pip value) / 1000:</p>   <p>Example: $10,000 account, risking 1% on GBP/USD with 35 pip stop: ($10,000 × 1%) ÷ (35 × $1) ÷ 1000 = 0.29 lots</p>   <p><strong>Pattern Quality Adjustments</strong></p>   <ul> <li><strong>High-quality pattern:</strong> Standard risk (1-3% account)</li> <li><strong>Medium-quality pattern:</strong> Reduce risk to 1% max</li> <li><strong>Low-quality pattern:</strong> Reduce risk by 50%</li> </ul>   <p><strong>Volatility Considerations</strong></p>   <ul> <li><strong>ATR-Based Protection:</strong> During high-volatility periods, use Average True Range to adjust stop distance</li> <li><strong>News Protection:</strong> Add 20-25% to stop distance when holding through major economic releases</li> <li><strong>Correlation Risk:</strong> When trading multiple Cup and Handle chart patterns in correlated pairs, reduce overall exposure</li> </ul> <h3>Cup and Handle Pattern Target and Exit</h3> <p>Bulkowski's research shows clear statistical tendencies in how far Cup and Handle chart patterns typically move after breakout:</p> <h4>Multiple Cup and Handle Pattern Targets</h4> <p>Structure a tiered exit strategy based on statistical probabilities:</p>   <ul> <li><strong>First Profit Target:</strong> 61.8% of cup height measured from breakout (50% reached by ~76% of patterns)</li> <li><strong>Second Profit Target:</strong> 100% of cup height (reached by ~50% of patterns)</li> <li><strong>Third Profit Target:</strong> 138.2% of cup height</li> </ul>   <p>Remember that you can also use the handle in a similar manner, with extended projections potentially providing signals of Fibonacci clusters.</p> <h4>Position Scaling</h4> <p>Rather than all-or-nothing exits, implement partial position management:</p>   <ul> <li>Exit 1/3 position at first profit target</li> <li>Move stop to breakeven after the first profit target hit</li> <li>Exit 1/3 at the second profit target</li> <li>Trail remaining 1/3 with chandelier exit (3× ATR from highest high)</li> </ul> <h4>Pattern-Specific Adjustments</h4> <p>Optimise Cup and Handle pattern targets based on specific pattern characteristics:</p>   <ul> <li><strong>Tall patterns:</strong> May add 5% to profit target distances (statistical outperformance)</li> <li><strong>Short handles:</strong> May add 5% to profit target distances</li> <li><strong>Higher left cup lip:</strong> May add to profit target distances</li> <li><strong>Deep cup pattern in trading (or handle):</strong> Reduce profit target expectations</li> </ul>   <p>By implementing this systematic framework for trade management, traders can transform the Cup and Handle from a mere chart pattern into a complete trading strategy with precise execution guidelines at every stage.</p> <h2>Bullish Cup and Handle Trading Strategy Example</h2> <p>Below is an example of a Cup and Handle trade on the daily chart of the USD/CAD currency pair, incorporating previously discussed aspects.</p> <h3>Bullish C&H Pattern Quality Assessment</h3> <p>First, let's classify this USD/CAD setup using our pattern quality framework:</p>   <ol> <li><strong>Prior Uptrend:</strong> Clear uptrend from 1.20 leading to the pattern</li> <li><strong>Cup Formation:</strong> Well-defined U-shaped cup of 8 weeks, pulling back 40%</li> <li><strong>Cup Lip Symmetry:</strong> The left and right lips are equal; the left side is a tad higher</li> <li><strong>Handle Formation:</strong> Properly formed at the top of the cup; corrected 50% of the cup in 4 sessions (Important context: prices reversed on a bullish Marubozu engulfing nearly all the handle depth, otherwise this trade would be invalid)</li> <li><strong>Handle Duration:</strong> 4 days; considerably shorter than the cup, which is preferred statistically</li> <li><strong>Volume Behaviour:</strong> Declined during cup and handle formation, increased at handle support and following the bullish breakout</li> </ol> <p><img alt="Bullish Cup and Handle Trade, USDCAD Forex Pair (ThinkMarkets)" src="/getmedia/7c59166c-2691-4ad7-a26a-f57fc9115393/Academy-Tech-analysis-Cup-and-Handle-T-Trade-6-Step-Assessment-USDCAD.jpg" /></p>   <p style="text-align: center;">Cup and Handle Trade 6-Step Assessment, USDCAD</p>   <p>This USD/CAD example qualifies as a high-quality pattern because it displays all the key characteristics that Bulkowski's research identified as predictive of success:</p>   <ul> <li>U-shaped cup</li> <li>Proper handle position considering the market context</li> <li>Very short handle duration in comparison to the cup</li> <li>Appropriate volume behaviour, with increases supporting higher prices alongside momentum</li> </ul> <h3>USDCAD Cup and Handle Trading Strategy</h3> <h4>1. Bullish Cup and Handle Pattern Entry</h4> <p><strong>Approach:</strong> Rather than using a generic entry, we applied the conservative entry approach - entering a 70% position when the price broke above the 1.3224 resistance level (at the close of the candle at 1.3250)</p>   <p><strong>Volume Confirmation:</strong> The breakout showed light volume compared to the handle average</p>   <p><strong>Session Consideration:</strong> The breakout occurred during the New York session, at optimal liquidity conditions</p>   <p><strong>Technical Confirmation:</strong> RSI showed bullish divergence at the handle and got a boost past 50</p> <h4>2. Stop-Loss Placement</h4> <p><strong>Statistical Approach:</strong> We placed the stop at 1.2915 using the 61.8% Fibonacci retracement of the cup depth rather than simply below the handle low</p>   <p><strong>Volatility Assessment:</strong> The 335-pip stop represented approximately 3× the average daily range of USD/CAD during this period (20-day ATR), appropriate for a major pair</p>   <p><strong>Risk Alignment:</strong> This stop placement allowed for proper position sizing while accounting for the typical volatility characteristics of USD/CAD</p> <h4>3. Bullish Cup and Handle Pattern Target</h4> <p>Multiple Cup and Handle Pattern Targets</p>   <ul> <li><strong>First Profit Target:</strong> 61.8% of cup height at 1.3532 reached 5 sessions after the Cup and Handle pattern breakout (along with RSI peak)</li> <li><strong>Second Profit Target:</strong> 100% of cup height at 1.3585 reached approximately 7 sessions after the Cup and Handle pattern breakout (RSI continued in overbought region)</li> <li><strong>Third Profit Target</strong> 138.2% of cup height reached approximately 20 sessions after the Cup and Handle breakout (price peaked while RSI fell, forming divergence)</li> </ul> <h4>4. Cup & Handle Exit</h4> <p>Following our framework, we:</p>   <ul> <li>Exited 1/3 position at first profit target</li> <li>Moved the stop to breakeven after the first profit target was hit</li> <li>Exited another 1/3 at the second profit target</li> <li>Trailed remainder with a chandelier exit (3× ATR from highest high)</li> </ul> <p><img alt="Achieved Cup and Handle Target, USDCAD Forex Pair (ThinkMarkets)" src="/getmedia/da56535f-e0ba-47f8-8671-a191e2ea36b5/Academy-Tech-analysis-Cup-and-Handle-T-Bullish-Cup-and-Handle-Trade-USDCAD.jpg" /></p>   <p style="text-align: center;">Bullish Cup and Handle Trade, USDCAD</p> <h3>Bullish Cup-Handle Trade Outcome and Adjustments</h3> <p>The Cup and Handle pattern breakout for the USD/CAD setup met and exceeded the height of the cup, validating the cup height projection method and achieving an approximately 2:1 (1.98) risk-to-reward ratio.</p>   <p>We made the following pattern-specific adjustments based on our framework:</p>   <ul> <li><strong>Higher Left Cup Lip:</strong> Employed a 3-prong take-profit strategy based on Bulkowski's finding that some patterns witness extended gains</li> <li><strong>Shorter Handle Duration:</strong> Added to Cup and Handle pattern target distances, as short handles historically outperform</li> <li><strong>Significant Pair Volatility:</strong> Used standard volatility parameters for stop trailing, as USD/CAD is a major pair</li> </ul> <h3>Key Lessons from the USDCAD Price Chart</h3> <p>This USD/CAD example illustrates how applying our structured approach to Cup and Handle trading in forex markets produces more consistent results:</p>   <p><strong>Pattern Classification Matters:</strong> By properly classifying the pattern quality, we correctly allocated appropriate position size and risk parameters</p>   <p><strong>Statistical Edge:</strong> Our stop placement at the 61.8% Fibonacci retracement level applied Bulkowski's maximum handle depth of 50%, leaving little room to manoeuvre</p>   <p><strong>Forex-Specific Timing:</strong> By focusing on proper session alignment (NY session breakout), we ensured adequate liquidity for trade execution</p>   <p><strong>Multi-Timeframe Validation:</strong> Verification of the pattern across timeframes (daily for pattern identification, H4 for handle analysis, and M15 for precise entry</p>   <p><strong>Volume Analysis Framework:</strong> The U-shaped volume shape with an increase during the handle, followed by expansion after the breakout (lighter volume at breakout!), supplied extra confirmation</p>   <p>The USDCAD example suggests how transforming basic Cup and Handle identification into a strategic trading methodology can improve trading results in forex markets.</p> <h2>Ready to Trade a Cup and Handle Formation?</h2> <p>When traded systematically, the Cup and Handle pattern represents one of the most reliable bullish continuation patterns. By implementing the framework outlined in this guide and our first article, forex traders can transform pattern recognition into a Cup and Handle trading strategy with solid rules for entering and exiting trades while managing pattern-specific risks.</p>   <p>Success with trading Cup and Handle patterns depends not just on spotting them, but on understanding their fundamentals, qualifying their characteristics, and adapting trades to forex market conditions. When done correctly, Cup and Handle trading offers forex traders a statistically backed edge for capturing continuation moves in trending markets.</p> <div class="article__content"> <style type="text/css">.didyouknow { display: block; background: #F1FDf0; width: 600px; border-radius: 20px; gap: 20px; padding-top: 48px; padding-right: 40px; padding-bottom: 48px; padding-left: 40px; font-family: Figtree; font-weight: 600; font-size: 22px; line-height: 140%; letter-spacing: 0%; } </style> </div> <div style="text-align: center;"> <style type="text/css">.btn { font: Figtree; justify-content: center; align-items: center; text-align: center; gap: 7px; font-style: normal; font-size: 18px; line-height: 24px; padding: 13px 20px; border: 1px solid #ddd; border-radius: 38px; background: #5EE15A; } </style> </div> <div class="didyouknow">Are you Ready to Test Your Cup and Handle Trading Strategy?<br /> <br /> <a class="btn" href="https://portal.thinkmarkets.com/account/individual/" style="text-decoration: none; font-weight: 500; color: #000000; background: 5EE15A;" target="_blank">Try here!</a></div>

16 min readAll

Technical analysis

Cup and Handle Pattern for Forex Trading

<p>The Cup and Handle pattern is a popular chart pattern among technical analysts and is known for its memorable shape. First popularised in 1988, this powerful continuation pattern has stood the test of time across multiple markets, including forex trading.</p>   <p>The forex technical pattern comprises a distinctive rounded consolidation known as the “cup” and a smaller pullback, the “handle,” adjacent to its right-hand side. The visual signature of the Cup and Handle formation makes it accessible to traders of all experience levels, while its strong statistical performance of 95% in bull markets gives it substantial credibility in technical analysis.</p>   <p>Backtests on 471 occurrences show that the Cup-Handle pattern is a bullish continuation pattern most of the time when properly identified. Beyond its high directional accuracy in uptrends, it provides forex traders with reliable setups featuring low chances of false breakouts.</p>   <p>Whether you are an experienced trader looking to refine your Cup & Handle pattern strategy or a newcomer seeking reliable formations, this short guide will provide the knowledge needed to successfully identify and trade the Cup & Handle pattern in the forex market.</p>   <p>In particular, after reading this short guide, you will learn:</p>   <ul> <li>What the Cup and Handle chart pattern is and why it forms</li> <li>The anatomy and specific stages that shape the pattern</li> <li>How to correctly identify valid Cup and Handle formations</li> <li>A way to adjust findings to increase reliability in the forex market</li> <li>How the Cup Handle pattern works in action on a forex pair (at the point of the handle)</li> </ul> <h2>What is the Cup and Handle Pattern</h2> <p>The Cup and Handle <a href="/en/trading-academy/technical-analysis/day-trading-chart-patterns/">chart pattern</a> is a powerful continuation chart pattern first identified and popularised by William J. O’Neil in his 1988 book, “How to Make Money in Stocks”. O'Neill observed the pattern recurring in hundreds of stocks that went on to continue prior advances following a period of consolidation.</p>   <p>The pattern resembles a rounded bottom formation (the cup), followed by a smaller consolidation (the handle), which forms at the upper half of the cup.</p> <p><img alt="Cup and Handle Trading Pattern (ThinkMarkets)" src="/getmedia/32393c2b-1ad8-4b1f-99e0-df8bca33ca39/Article-Tech-analysis-Cup-and-Handle-pattern-Volume-Behaviour-During-Triangle-Formation.png" /></p>   <p style="text-align: center;">Cup and Handle Formation</p>   <p>According to Thomas Bulkowski's extensive research, when properly formed, this pattern reflects an emotional journey that creates a high-probability setup for continuing the prior trend in bullish markets.</p> <h2>How Does the Cup and Handle Pattern Form?</h2> <p>The bullish Cup and Handle pattern develops systematically and reflects the changing cycle of market psychology:</p>   <ul> <li><strong>Initial Optimism:</strong> Creating the pre-cup high</li> <li><strong>Doubt and Fear:</strong> Forming the cup's decline</li> <li><strong>Rebuilding Confidence:</strong> Creating the cup's recovery</li> <li><strong>Brief Hesitation:</strong> Forming the handle</li> <li><strong>Renewed Conviction:</strong> Producing the breakout point</li> </ul>   <p>O’Neil identified four primary stages of the setup, which were later discovered to apply across multiple asset classes.</p> <h3>Stage 1: Formation of the Pre-Cup High</h3> <p>Initial enthusiasm takes an asset to a new high during a strong uptrend. Bulkowski suggests a minimum price increase before the cup begins forming (30% in the stock markets). After establishing this new high (which would be tested), profit-taking and selling pressure cause the price to decline.</p> <h3>Stage 2: Formation of the Cup</h3> <p>Due to its gradual distribution, the cup forms a rounded bottom rather than a sharp drop. Ideally, it forms a smooth, U-shaped bottom. V-shaped cups can also form, but they are considered less reliable.</p>   <p>As the price approaches the bottom of the cup, it signals that selling pressure is finally being absorbed. Following the rounded bottom formation, confidence increases as buyers rebuild strength, slowly accumulating positions back toward the previous high in an identical manner.</p> <h3>Stage 3: Formation of the Handle</h3> <p>As the price reaches the top of the cup (the cup lip or rim), it meets resistance, and traders start taking profits. This creates a small pullback that should show no signs of trend reversal. The selling pressure is shallow as buyers prepare for the next leg upward.</p>   <p>The handle typically forms as a descending channel, a flag, or a pennant pattern, with its depth preferably less than one-third of the cup's depth. Notably, shorter handles (shorter than the median length) tend to outperform those with longer handles, with shallow handles indicating stronger bullish potential.</p> <h3>Stage 4: Cup and Handle Pattern Breakout</h3> <p>When the price breaks out of the handle or the cup rim (especially when both cup lips are at approximately the same level), it marks the end of the consolidation and the continuation of the prevailing trend. This breakout from the handle is typically characterised by higher momentum and trading volume.</p>   <p>Technical traders often confirm momentum with the RSI indicator. The closer it is to 70 (or if it exceeds it), the more likely the price will continue to rise towards a target price. For trading volume confirmation, Bulkowski notes that U-shaped volume patterns tend to show the best performance after the Cup and Handle pattern breakout.</p> <p><img alt="How Does the Cup And Handle Pattern Form (ThinkMarkets)" src="/getmedia/61d9dcad-e332-44ad-94b0-fb032b729df7/Article-Tech-analysis-Cup-and-Handle-pattern-Volume-Behaviour-During-Triangle-Formation.png" /></p>   <p style="text-align: center;">Stages of the Cup and Handle Pattern</p> <h2>Types of Cup and Handle Patterns</h2> <p>Most literature refers to the bullish Cup and Handle pattern as traders envision a Cup with a Handle in an upright position. However, another type exists, the reverse Cup and Handle pattern, which has proven especially effective in bear markets.</p> <p><img alt="Cup and Handle and Inverse Cup and Handle Patterns (ThinkMarkets)" src="/getmedia/cd0870cf-785b-4526-af6c-09b628516696/Article-Tech-analysis-Cup-and-Handle-left-and-Inverse-Cup-and-Handle-right.png" /></p>   <p style="text-align: center;">Cup and Handle (left) and Inverse Cup and Handle (right)</p> <h2>The Standard Cup and Handle Pattern</h2> <p>The standard Cup and Handle is one of the most widely recognised and reliable bullish continuation chart patterns in <a href="/en/trading-academy/technical-analysis/what-is-technical-analysis-in-trading/">technical analysis</a>. According to Bulkowski's study, it tracks a success rate of 95% in bull markets and 100% in bear markets as an upward breakout continuation—i.e., it gains at least 5% from the breakout point of the handle.</p> <h4>Key Characteristics of the Cup and Handle Pattern</h4> <ul> <li><strong>The Cup:</strong> A rounded, U-shaped bottom that forms after a price decline, resembling a bowl or cup.</li> <li><strong>Cup Depth:</strong> While there are no strict requirements, effective cups tend to show a significant correction from prior highs, forming the height of the cup, though shallow cups can also form.</li> <li><strong>The Handle:</strong> The handle represents a smaller consolidation pattern or slight pullback that forms on the right side of the cup near previous resistance levels.</li> <li><strong>Handle Depth:</strong> Preferably less than one-third of the cup's depth, with shorter handles outperforming longer ones. Cup Rims: The starting and ending points of the cup should be at approximately the same price level.</li> <li><strong>Breakout Confirmation: </strong>The pattern is confirmed when the price breaks above the handle, with light volume performing better in an up market than a down market.</li> <li><strong>Volume:</strong> U-shaped volume patterns tend to show the best performance after breakout.</li> </ul> <h3>The Inverted Cup and Handle Pattern</h3> <p>The Inverse Cup and Handle is a powerful bearish pattern that acts as both a continuation and reversal signal. Bulkowski indicates that this technical chart pattern performs exceptionally well in bear markets, with just a 24% failure rate compared to 47% in bull markets (assuming 15% gains in stocks). It also acts as a reversal in bull markets 63% of the time.</p> <h4>Key Characteristics of the Inverse Cup and Handle Pattern</h4> <ul> <li><strong>Formation Context:</strong> Can appear after either an uptrend (as a reversal signal, which occurs 57% of the time) or during a downtrend (as a continuation signal).</li> <li><strong>The Cup:</strong> An upside-down cup shape (rounded top) followed by a handle that forms at lower support levels.</li> <li><strong>Cup Rims:</strong> The starting and ending parts of the pattern should stop near the same price level (typically within a 6% difference).</li> <li><strong>Handle Formation:</strong> Forms between the right cup rim and the breakout.</li> <li><strong>Handle Retrace:</strong> The handle should show an upward bounce (most commonly retracing 42% of the decline).</li> <li><strong>Breakout Confirmation:</strong> The pattern confirms when the price breaks below the lowest point of the handle.</li> <li><strong>Pattern Structure:</strong> Tall and narrow inverted cup patterns consistently outperform short and wide ones.</li> </ul>   <p>The standard bullish pattern performs best in bull markets, while the inverted version is considered a better bearish Cup and Handle pattern.</p> <h2>How to Identify The Cup and Handle Pattern</h2> <p>Based on Bulkowski's research, here are the general steps used to identify the Cup and Handle formation correctly:</p>   <ol> <li><strong>Verify the Prior Uptrend:</strong> Ensure a clear, established uptrend is in place on the left side of the cup before the pattern begins.</li> <li><strong>Confirm Cup Formation:</strong> Look for a rounded, U-shaped pattern (the cup) to appear after the uptrend.</li> <li><strong>Assess Cup Duration:</strong> The cup should take around two months to form, with those taking less than 7 weeks showing poorer performance (the validity of the pattern differs between stocks and forex — more on that later).</li> <li><strong>Evaluate Cup Depth:</strong> The cup's depth shouldn't be excessive. Patterns that are too deep often fail.</li> <li><strong>Check Cup Completion:</strong> Confirm the cup portion of the pattern by ensuring it rises to approximately the same high point as the previous move (the cup lips should be at about the same price level).</li> <li><strong>Analyse Handle Formation:</strong> Following the cup, wait for a smaller downward pullback (the handle) to form. This handle should ideally: <ul> <li>Form in the upper half of the cup pattern</li> <li>Retrace less than a third of the cup</li> <li>Have a downward price and volume trend</li> <li>Last at least 1 week, but shorter handles outperform longer ones</li> </ul> </li> <li><strong>Confirm Pattern Completion:</strong> The pattern is complete when the price returns and exceeds the resistance level (the cup and the handle).</li> </ol> <h2>Common Mistakes in Identifying and Trading C&H</h2> <p>It's worth considering common identification mistakes to avoid, with technical traders making identical errors.</p> <p><img alt="Cup and Handle Trading Mistakes (ThinkMarkets)" src="/getmedia/aaac3365-ca80-44c8-abe1-f5c54d848bc1/Article-Tech-analysis-Cup-and-Handle-pattern-Trading-Mistakes.png" /></p>   <p style="text-align: center;">Trader Mistakes When Trading Cup and Handle</p>   <p>When the Cup and Handle formation fails, traders can still derive valuable lessons, like:</p>   <ul> <li>Always combine pattern recognition with other technical factors before entry</li> <li>Use clear, predefined Cup and Handle pattern entry and exit strategies with proper <a href="/en/trading-academy/cfds/risk-management-tools-in-cfd-trading/">risk management</a>.</li> <li>Consider similar patterns like rounded bottoms, which may offer better setup conditions.</li> <li>Monitor volume patterns closely throughout the trading formation and especially during a breakout.</li> </ul>   <p>While both Cup and Handle variations require certain techniques to identify and trade properly, they also demand special treatment in forex as they appear in different market conditions and across multiple timeframes.</p> <h2>How to Use the Cup and Handle Formation in Forex Markets</h2> <p>While the Cup and Handle chart pattern is reliable in stock markets (74% success rate according to Bulkowski's research), its use as a forex Cup and Handle pattern requires several adjustments due to the different market characteristics:</p>   <ul> <li><strong>Market Volatility:</strong> During periods of heightened volatility (such as the London-US overlap and high-impact news releases), false Cup and Handle pattern breakouts become more common.</li> <li><strong>24-Hour Trading:</strong> Unlike stock markets, the continuous nature of forex trading can affect pattern formation and completion.</li> <li><strong>Liquidity Differences:</strong> Major currency pairs have significantly different liquidity profiles than exotic pairs, affecting pattern quality.</li> <li><strong>FX Pair Selection:</strong> Major forex pairs (like EUR/USD, GBP/USD, and USD/JPY) create smoother price action, while minor/crosses and exotic pairs see erratic market movements, making identifying the Cup and Handle formation more challenging.</li> </ul>   <p>Bulkowski can be particularly instructive here. He found that smooth, U-shaped cups outperformed V-shaped ones. With their liquidity, major pairs tend to form better U-shaped cups than exotic pairs.</p>   <p>Here's how to adapt Bulkowski's study to trade a forex Cup and Handle pattern (according to <a href="https://www.quantifiedstrategies.com/cup-and-handle-trading-strategy/" target="_blank">backtests</a>):</p> <p><img alt="Forex Cup and Handle Trading (ThinkMarkets)" src="/getmedia/2bd92c89-0a92-4ae2-bacd-674b91193784/Article-Tech-analysis-Cup-and-Handle-pattern-Trading-Mistakes-1.png" /></p>   <p style="text-align: center;">How to Trade Cup and Handle in Forex</p> <h3>Time Frame Considerations</h3> <p>Cup and Handle trading differs across various time frames in forex markets:</p> <p><img alt="Best Cup and Handle Trades (ThinkMarkets)" src="/getmedia/79c57682-7bc7-414a-a2da-0b1e9038b7d2/Article-Tech-analysis-Cup-and-Handle-pattern-Symmetrical-Triangle-Variations-ThinkMarkets.png" /></p>   <p style="text-align: center;">Cup and Handle Timeframe Considerations</p>   <p>Regardless of the chosen time frame, traders can enhance pattern reliability through multi-timeframe analysis:</p>   <ul> <li><strong>Top-down approach:</strong> Identify the pattern on a higher time frame (like the 4H or daily) and refine entry and exit points on lower charts (1H and 30M).</li> <li><strong>Bottom-up approach:</strong> Spot the Cup and Handle chart pattern on a lower time frame and confirm its alignment with the broader market trend on higher time frames.</li> </ul> <h2>Pattern Confirmation in Forex</h2> <p>Trading the pattern in forex should involve a multi-pronged approach of supporting indicators, <a href="/en/trading-academy/technical-analysis/support-resistance/">trendline analysis</a>, and market context evaluation. Ultimately, the aim is to take only the best setups to reduce the failure rate.</p> <h3>Supporting Indicators</h3> <p><strong>RSI (momentum confirmation):</strong> High momentum (readings near or above 70) after the setup is complete indicates a higher likelihood of price continuing upward; divergence when the handle is formed can be a bullish sign.</p>   <p><strong>MACD (secondary momentum confirmation):</strong> "Crossovers" as the handle forms suggest a good probability of an eventual breakout.</p>   <p><strong>Moving averages (trend validation):</strong> Popular MA periods (50, 100, 200) help validate bullish intent; O’Neil notes that, as far as the handle pattern is considered, when it forms below the 200-day, it shows worse performance.</p>   <p><strong>Trading Volume:</strong> U-shaped volume patterns perform best; increasing volume on breakout improves pattern reliability in downtrends.</p> <h3>Trendline Analysis</h3> <p><a href="/en/trading-academy/technical-analysis/support-resistance/">Trendlines</a> provide structural insight into price behaviour when exploring the Cup and Handle chart pattern. Here are the various trend lines you can draw:</p>   <ul> <li><strong>Prior trendline check:</strong> Draw a trendline from previous swing lows to confirm the extent of the prior uptrend.</li> <li><strong>Handle trendline:</strong> Apply a descending trend line along the highs of the handle — a break of this line with increasing volume provides an early Cup and Handle pattern entry signal.</li> <li><strong>Neck/resistance line:</strong> Mark the horizontal resistance at the cup's rim — a convincing close above this level validates the Cup and Handle pattern breakout.</li> </ul> <h3>Market Context Evaluation</h3> <p>The broader market dynamics also matter when confirming the Cup and Handle formation. Here are some pointers:</p>   <ul> <li><strong>Time frame alignment:</strong> Multi-timeframe analysis ensures trading with the dominant trend.</li> <li><strong>News/economic events:</strong> High-impact events can invalidate forex chart patterns; external factors often disrupt otherwise valid patterns.</li> <li><strong>Correlation check:</strong> Look at whether other correlated pairs exhibit similar setups for higher conviction.</li> <li><strong>Market condition:</strong> Bulkowski's research clearly shows that standard bullish Cup and Handle patterns perform best in bull markets, while inverted patterns excel in bear markets.</li> </ul>   <p>By applying these techniques to forex trading and incorporating Bulkowski's findings, traders can improve their Cup and Handle pattern recognition and trading success in the currency markets.</p> <div class="article__content"> <style type="text/css">.didyouknow { display: block; background: #F1FDf0; width: 600px; border-radius: 20px; gap: 20px; padding-top: 48px; padding-right: 40px; padding-bottom: 48px; padding-left: 40px; font-family: Figtree; font-weight: 600; font-size: 22px; line-height: 140%; letter-spacing: 0%; } </style> </div> <div style="text-align: center;"> <style type="text/css">.btn { font: Figtree; justify-content: center; align-items: center; text-align: center; gap: 7px; font-style: normal; font-size: 18px; line-height: 24px; padding: 13px 20px; border: 1px solid #ddd; border-radius: 38px; background: #5EE15A; } </style> </div> <div class="didyouknow">Ready to test the Cup and Handle Pattern in Forex?<br /> <br /> <a class="btn" href="https://portal.thinkmarkets.com/account/individual/demo" style="text-decoration: none; font-weight: 500; color: #000000; background: 5EE15A;" target="_blank">Test it here</a></div> <h2>Cup and Handle Trade Example in Forex Markets (Bullish Pattern)</h2> <p>With everything discussed, below is a bear market example of a Cup and Handle trade on the 4H chart of USD/JPY. Note that the handle has yet to form completely, and the cup could also extend towards 151.20.</p> <p><img alt="Cup and Handle Pattern, EURUSD Trade - ThinkMarkets" src="/getmedia/167eda9e-83bb-413d-a364-03430794a2ac/Article-Tech-analysis-Cup-and-Handle-pattern-EURUSD-Bullish-Running-Triangle-Breakout.jpg" /></p>   <p style="text-align: center;">Cup and Handle Pattern, EURUSD Trade - ThinkMarkets, PictureCup and Handle Trade Example, USDJPY</p> <h3>Market Context</h3> <p>The downtrend has been ongoing, making this Cup and Handle pattern example a bear <a href="/en/trading-academy/indicators-and-patterns/continuation-candlestick-patterns/">market continuation</a> formation with an upward breakout. The rounded bottom formed at a psychological level (140.00) and began shifting gradually towards 148.66, where the handle should form. As the image depicts, the handle has fallen to around 35% of the cup’s depth, forming neckline resistance.</p> <h3>Pattern and Technical Indicator Analysis</h3> <p>The Cup and Handle formed a rounded bottom, with the gradual upside movement slightly more volatile than the decline. Note that the cup appeared near the 38.2% Fibonacci retracement of the longer-term uptrend from 109 to 162, accounting for the prevailing longer-term trend.</p>   <p>The cup's bottom also aligned with a momentum bottom, and its rim with a momentum top. However, one alarming signal that the Cup might be incomplete is the previous RSI peak, around 151.20. The handle also witnessed an RSI drop to the 50 level, shallow in depth but fast. A higher cup should ideally point to the upside.</p>   <p>Another technical confirmation is the U-shaped volume pattern. A volume increase is not necessarily supportive in this case, as light volumes have shown better results in upward breakouts.</p> <h3>Entry, Stop Loss and Take Profit Trading Strategies</h3> <p>The standard entry with the Cup and Handle is a close above the resistance (i.e., 148.66).</p>   <p>The stop loss is typically placed at the low of the handle's formation (in this case, 145.65).</p>   <p>In terms of Cup and Handle pattern targets, a better-performing price target is 50% of the depth of the cup at 153.00 (half the measured move target). However, since stop losses can trail and targets move to optimise risk-reward, this might act as the first level, with the second target at 157.32. Note that this provides a risk-reward ratio of 2.88 to the second target.</p>   <p>In this sample Cup and Handle trade, it might make more sense to monitor price action around 151.20. If prices reverse or fall at any point under the 50% Fibonacci of 144.33, consider cutting gains short.</p> <h2>Next Steps to Trade the Cup and Handle Pattern</h2> <p>The Cup and Handle formation and its inverse version stand as one of technical analysis's most statistically reliable formations, with stock market research confirming an over 95% success rate in bull and bear markets when properly identified. To successfully implement this pattern in forex trading:</p>   <ul> <li><strong>Focus on quality identification:</strong> Wait for clear uptrends, ensure U-shaped cups, verify proper handle formation, and confirm breakouts with volume.</li> <li><strong>Apply contextual confirmation:</strong> Combine the pattern with supporting <a href="/en/trading-academy/indicators-and-patterns/technical-indicators-beginners-guide/">technical indicators</a> like volume, analyse multiple Cup and Handle pattern time frames, and consider market context before entering a trade.</li> <li><strong>Manage risk in an effective way:</strong> Place strategic stops below the handle, implement realistic profit targets, and adapt your approach to changing volatility.</li> </ul>   <p>By applying these principles with disciplined execution while considering our adjustments for forex, the Cup and Handle chart pattern can become a powerful addition to your breakout trading strategy.</p>

16 min readAll

Technical analysis

Discover how to identify potential trading opportunities by reading and analysing charts effectively.