Basics of Technical analysis: Cup and Handle patterns

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A cup and handle pattern is a technical indicator that looks like a cup with a handle, with the cup shaped like a “U” and the handle having a small downward drift, on the price chart of a crypto asset. The pattern was developed by William O Neil and first described in his 1988 book “How to Make Money in Stocks”. 

Source: IG

The cup and handle pattern typically appears in both small and large timeframes, such as one-minute charts, daily, weekly, and monthly charts. Although it aids in identifying buying opportunities, this pattern has its own limitations:

• It does not occur at a specific point in time. Sometimes the pattern forms within days, but sometimes it takes up to a year for it to fully develop. 
• Because false signals can occur, traders need to learn to identify the length and depth of a true cup and handle. 

A cup and handle chart may indicate either a continuation or reversal pattern.

The continuation pattern develops during an uptrend: the price rises, forms a cup and handle, and then keeps rising.

Source: Elearnmarkets

In contrast, a reversal pattern occurs after a prolonged downtrend and reverses the trend.

Source: Elearnmarkets

What does the cup and handle pattern tell you?

Generally, a cup and handle pattern is considered a bullish signal, with lower trading volume usually seen on its right-hand side. As identified by O’Neil, these are the four primary stages of this pattern. 

• An asset will first hit a new high in an uptrend one to three months prior to the “cup” pattern starting.
• The asset will then retrace its previous movement, dropping no more than 50% of the high, resulting in a rounding bottom.
• Next, the asset will fall and then bounce back to its prior high, forming the “handle” part.
• Finally, the asset will break out again, exceeding its highs, which are equal to the cup’s lowest point in depth.

How to identify a cup and handle pattern?

When identifying cup and handle patterns, the following factors should be taken into account:

• Length: Typically, cups with longer "U"-shaped bottoms convey stronger signals. It is best to avoid cups with pointed "V" bottoms.
• Depth: The handle should be smaller than the cup. It should preferably remain in the upper third and not fall into the cup's lower half.
• Volume: Volume should increase when the asset starts to move higher and decrease when prices decline and remain lower than normal in the base of the bowl.

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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.