Plot: First, it's important that there is an upward trend before the formation of the . In general, the larger the prior trend is, the lower the potential for a large breakout after the pattern has been completed.
Reason of the Shape: The reason is that a cup-and-handle pattern is a signal of consolidation within a trend, where the weaker investors leave the market and new buyers and prior holders stay in the market. If the shape of the cup is too sharp or V-Shape (or quick), it is not considered a true consolidation phase in the upward trend and thus weakens the potential trade signal.
Cup: A cup formation happens when the price moving in an uptrend shows a pullback followed by a consolidation period which makes the bottom of the cup and finally the reverse back to upside continuing the uptrend. Bottom of a cup serves as support for the pattern as shown in above chart. Usually the pattern looks like a 'U' to round bottom. The cup should be considered reliable only when it is less than half percentage of the preceding trend. The deeper the 'U' or round shape the reliable the pattern is.
Handle: The handle is the downward move after the upward move on the right side of the cup. During this downward move, a descending trendline can be drawn, which forms the signal for the breakout. A move above this descending trendline is a signal that the prior upward trend is set to begin.
Major Breakouts: 1. Descending/Downward or Resistance of the Handle
2. The price point of the two peaks in the cup
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Just wanted to add some minor points so that complete information is at one place(Hope you don't mind it)
1. The cup should be U-shaped, not V-shaped.
2. Handle should form in upper half of the cup.
3. It is a longer pattern : Cup duration 7 to 65 weeks & Handle 1-2 week (minimum 1 week).
Source : Encyclopedia of Chart Patterns by Thomas N. Bulkowski(Good book).
I above description I have mentioned that in case of a V shape formation, there will be a sharper move to upside but not produce reliable breakout. It is true that Cup N Handles generally have a U shape formation.
Thank you for sharing valuable points. Regards