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Although it didn’t come from the traditional trading patterns, today the cup-and-handle pattern is almost synonymous with the rest of classics. The classic pattern used know by many technical analysts are the triangle, rectangle, head-and-shoulders, pennant, flag, double-bottom[/url] and double-top. These are just a few classical formations that many have come to know. But William O’Neill, founder of Investor’s Business Daily, turned himself from a modest investor to a multi-millionaire, published his book “How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition”. During his time as investor, he identified a few price patterns of his own to find successful setups. He revealed in his book a few of the pattern he identified, coined and used to profit. We’ve all heard this trading pattern a few times but very few know the characteristics, let alone how to trade it. This pattern usually forms during late stages of the bull markets where corrections tend to be deeper.

Below is an example of a cup and handle.

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In many ways, this pattern looks similar to the ascending triangle where if a trendline is drawn from the low of the cup to the low of the handle, it would resemble like this.

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What causes this pattern? Before the cup-and-handle established at the top left side of the cup, the prices and new high. It retraced due to some profit-taking. Some of the selling got carried away by the bears, extending it further than normal. However, on higher timeframes, such as weekly or monthly, the trend was still intact. When the selling had subsided, the bulls would slowly move it back to the old high (top right side of the cup or left side of the handle). However, as soon as it reaches near the top, profit-taking commenced again, bear thinking that a double-top has formed. But this time the correction was minor despite the fervent bears, but this time with lower participation (volume) on the correction. This lack of participation encourages the bulls to once again take charge with higher volume as the last part of the handle is forming. Finally, the third attempt (right side of the handle) started with much higher volume than the last rally, indicating that the more bulls are participating. Finally, on the third attempt with much higher volume, prices break through the old high as prices climbed to new highs.

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Here are few more examples of what cup-and-handle formations look like. To properly qualify these formations as such, use the general guidelines given above.

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This formation can setup for a long or a short (upside down cup-and-handle). Just a little imagination, the formation can give some rewarding feedback. Further research is recommended to fully understand the concept as well as training the eyes to familiarize the pattern when they do occur.