The Cup and Handle pattern can be a bullish continuation pattern that begins using a consolidation period followed by the breakout. The pattern was put together by William O'Neil and discussed with his book, How to Make Money in Stocks.
As the title suggests, there are two parts of the pattern: the cup and the handle; the cup forms after a strong move and looks being a bowl or rounding formation. After the cup is completely formed, a trading range develops on the right the main pattern which ends up being the handle as well as the handle is formed.
In this example you will see IBM stock going through a regular Cup and Handle Pattern. The volatility on the market you are trading can have a substantial impact on how deep the cup shape becomes. The more volatile instruments have a tendency to cause the deepest cup formations. Whilst volatile markets reduce volatility substantially while entering trading range market place conditions.
A subsequent breakout from your handle's trading range signals a continuation on the previous price move.
I pay the most attention to the Handle because this is where the breakout signal arises. The best type of Handle breakouts start with strong momentum and build up momentum more than a period of several days. You need to bear in mind that the market just went through a relatively long trading range cycle and when the trending cycle starts the trend should fall under place relatively quickly without converting back. Notice the strength and increase of volatility just after the breakout levels are broken with this example.
The most important the main formation is the Handle. This can be a last stage of the consolidation before breakout. Generally speaking Handle patterns shouldn't last more than two weeks for quick trading purposes. This time period is not necessarily cut in stone and can be adjusted while using time frame that took the Cup formation in order to complete. I have noticed that Handle formations that form within just 2 weeks seem to produce the best breakouts with more follow through momentum. When Handle formations last period of time it is a sign which the market may not have sufficient momentum to go forward and break out of your trading range.
The Cup And Handle is a good trading pattern that works properly with different time frames sufficient reason for most financial markets such because stocks, futures, commodities and foreign currency markets. The Handle is the most important part of the formation and it must last only a few weeks and not hang too low in comparison with the Cup formation. The cup formation can last anywhere from several months to only a few weeks depending on the time frame you are trading. The breakout adopting the Cup formation must have enough momentum and produce noticeable increase in both volume and volatility to generate the trade worthwhile.