What's up everyone? All right? So in this episode, I'm going to walk you through the cup and handle pattern. This is a multi candlestick pattern that is very common. We see it a lot. It's a double top that pulls back creates the handle and then that gives us the opportunity to base risk off that little pullback before the next leg up.

This is another episode in the multi-part series on technical analysis and how to read stock charts for day trading specifically. But you can apply this pattern to swing trading or start from investing as well. So let's go ahead and jump in and I'm going to show you my whiteboard here and I'm going to draw a cup and handle formation. So the cup and handle formation begins with a stock squeezing up like this and it starts to pull back.

Now, the pullback initially might look like the formation of a traditional bull flag. That would be totally fine. What ends up happening is typically in this formation the stock will squeeze right back up really quickly to the high that's very common. And what ends up happening is we form a what's really like a double top.

Because we had a resistance, it dropped out and then it popped right back up to this level. So sometimes a more extreme version of the cup and handle formation will be when a stock breaks one of the rules of the bull flag pattern and one of the rules if you recall. The episode on how to trade bull flags is when a bull flag retraces more than 50 percent of the move up. So sometimes this happens where it sells off and then all of a sudden it comes right back up to the high like this.

and maybe that's in one candle. or maybe it's in two. but because it pulled back so much, traders were not confident enough to buy down here. It ends up squeezing up, which is great, but it ends up forming this double top.

And so the cup is the negative space that's created right in here. this u shape. So if you could draw a U shape, you've got a bit of a cup and that creates a double top, which is resistance. So in order for us to get in, maybe you bought the first candle to make a new high.

Okay, fair enough, but you probably didn't because usually it catches people a little off guard. So now what we need is for a handle to form, so a handle on the cup is going to take the place right in here. it's going to be this little formation here, so you've got your cup right there, and then you've got your handle. Okay, so what does that look like in the actual chart? What it looks like is a small pull back, sometimes one, sometimes two candles, and then a squeeze through the hive.

So again, small pull back, small pull back here, small pull back here, and then a squeeze through the high. Now, this is not exactly an Abcd setup because a proper Abcd setup, if you recall, is going to pull back quite a bit more on the second dip. So the proper Abcd pattern goes up like this. It pulls back like this.

It comes back up like this, and then pulls back here. a bit more like that, and then it comes back up here through this level. So this, I suppose it's possible that sometimes an Abcd pattern could look a little bit like a cup and handle, but that's not as common. A proper Abcd pattern pulls back much longer on this side than what your typical handle formation is.

So the cup and handle stock squeezes up. It pulls back sometimes sharply, and sometimes it's because there's you know, a doji at the top. This ends up being like a shooting star doji. Maybe this is on a high volume red candle.

So you've got light volume on the green candles coming up here. Light volume. And then there's a high volume red candle. So traders are like, i don't know, This feels weak and then out of nowhere it rips right back to the high and you're like, okay, I want to get in, but how do I manage my risk if I just buy it right there? I'm getting in at the high and the proper entry was down here even though I missed it.

So the next best thing is to wait for it to form this handle. Alternatively, if you don't get the opportunity to buy the handle formation, which would be because the stock ended up being so strong that it just, uh, I'm actually gonna do just two candle green so two kilograms. So we're going to do the pullback right here. Um, we're going to dip down and then this is going to surge right back up through the high like this.

So if it does this, your next best chance is to wait for the next pullback. and typically what's going to happen is it's going to pull back and it's going to retest the previous high or resistance. Now, this is not a a cup and handle formation because in this example, it broke through this level. The cup and handle happens when you have a double top of resistance and then you're waiting for it to break for the third attempt.

This right here is it simply broke and if that's the case, your entry is going to be down here off of support and then buying for the leg. Back up right here. All right. So that's a quick breakdown of the cup and handle formation.

Those that are curious and want to learn a little bit more about my strategy down in the description, you will see a link to download my micro Pullback Pdf. That Pdf breaks down the strategy of how I trade these little micro pullbacks right here and this is often in the form of a micro pullback right here, and all of this could occur on a five minute, a one minute, or even a 10 second chart. So if you want to learn a little bit more about trading micro pullbacks, check out that Pdf right down there in the description and I hope you guys are enjoying this multi-part series on technical analysis and how to read stock charts. If you are, make sure you hit the thumbs up and I hope you're subscribed to the channel and I'll put a link here to the next two videos in this series.

All right, I hope you enjoy them and I'll see you at the next episode.