A cup-and-handle chart pattern resembles a cup of coffee with a cup (half circle) and handle (downwards trading pattern). It is a bullish continuation pattern that marks a pause (sideways trend) in the bullish trend. The entire pattern can be anywhere between 1 month to a little more than year. The handle should generally by anywhere from a quarter to a little less than a half of the cup duration.
The cup should be well rounded, it can be fairly steep but should not be so abrupt that it looks like a V. It should also not be so flat that it could be mistaken for a straight line. The handle should be a fairly narrow downward or flat trend.
The cup and handle should always start with an upward trend. The height of the cup and the initial up trend are also important to have a successful cup and and handle pattern. The height of the cup should be approximately between one third (1/3) to two thirds (2/3 of the initial upward trend.
For example, if we have a stock that initial moved from 20 to 30$ and then started to create a cup, the height of that cup should be between about 3.3 (1/3 * 10) and 6.6 (2/3 * 10).
As with most technical analysis patterns, there are guidelines to indicate the strength of the trend.
1. The closer it is to a nicely rounded cup, the stronger the trent
2. The “handle” can only convert to a breakout when there is strong volume.