A smooth rounded bottom, a small pullback near the rim and a breakout up. Here is what a proper cup looks like, why the handle matters and how to trade the inverted bearish version.
A smooth U-shaped bottom, not a sharp V. Sellers run out of steam gradually.
Handle
A small pullback near the rim — the last shakeout before the rally.
Entry
A close above the rim after the handle.
Target
The depth of the cup, projected up from the breakout point.
What the pattern looks like
Price drops from a level, slowly forms a rounded bottom and returns to the original high — that's the cup. At the rim, buyers who bought the old high get out at breakeven and price makes a small pullback — the handle. Once that selling is absorbed, price breaks the rim and keeps rising.
A rounded bottom, a handle at the rim and a breakout. The dashed line on the right is the target based on the cup's depth. Illustrative data.
Signs of a quality pattern
A rounded bottom. A U-shaped cup shows a gradual change of control. A sharp V is just a fast reversal, not a cup.
A shallow handle. Usually no deeper than a third of the cup and in its upper half. A handle that's too deep breaks the pattern.
Volume. It fades at the bottom and in the handle and rises on the rim breakout.
Context. It's a continuation pattern: it works best after a prior rally.
How to trade it
01
Mark the rim
The high the decline started from.
02
Wait for the handle
Without a handle, entering at the rim means buying right under resistance.
03
Enter on the breakout
A close above the rim, ideally on rising volume. Or a retest of the rim from above.
04
Stop below the handle low
If price goes lower, buyers failed to hold the pullback.
05
Target the cup's depth
From the bottom to the rim, projected from the breakout point.
Inverted cup and handle
The bearish version: a rounded top, a small bounce-handle near the rim and a breakdown. It's traded as a mirror image: enter after a close below the rim, stop above the handle.
A rounded top, a bounce at the rim and a breakdown. Illustrative data.
A cup takes time to form. Don't "draw" one on every rounded stretch of a lower timeframe: a real pattern is obvious on the working chart without forcing it.
Common mistakes
Buying at the rim without a handle
The rim is resistance. Without a handle and a breakout, that's buying in the worst possible spot.
Mistaking a V for a cup
A sharp V reversal doesn't give the gradual change of control the pattern is traded for.
Ignoring the handle's depth
If the handle ate more than half the cup, the pattern is most likely broken.
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