The cup with handle

The cup with handle became known mainly through William O'Neil, who described it in the 1980s as a buy pattern for growing companies.

What it's about

After a high the price falls slowly, forms a rounded bottom and rises back to the old level. There it gives way slightly once more, the handle. Many who bought at the old high sell here at break even. After that the way is clear, so the idea goes.

How to recognise it

• A rounded, not a pointed bottom.
• The cup usually takes weeks to months.
• The handle is small and sits in the upper half of the cup.
• A close above the rim counts as a breakout.

How the price target is estimated

The depth of the cup is added to the rim. Rim at €90, bottom at €75, so €15 deep: the target is around €105.

Where it misleads you

How round a bottom has to be and how small a handle is a matter of opinion. And the cup takes a long time to form. A lot can happen in that time that has nothing to do with the chart.

An example trade with made up numbers

Eva has €10,000 in her account and risks at most €150 per trade. A stock has formed a cup and rises out of the handle above the rim at €90. The handle low was at €86. Eva buys at €90.50 and sets her stop loss at €85.50. With that distance, she buys 30 shares for €2,715. Costs: €1 each to buy and sell, plus about 2 cents of spread per share on each order.

If it works: The price rises to €102 and Eva sells before the estimated target. Eva is €345 ahead. After €2 in fees and €1.20 in spread, €341.80 is left.

If it goes wrong: The breakout fails and the stop fills at €85.30. That's a €156 loss, €159.20 with costs.

Because the handle was €5 below the entry, Eva could only buy 30 shares. A distant but sensible stop makes the position small.