Many traders use Japanese candlestick charts to analyze the price of an asset…
Cup and Handle Pattern
2023-01-26 • Updated
What Is a Cup and Handle Pattern?
A Cup and Handle price pattern is a technical chart setup that resembles a cup with a handle. The cup has a "u" shape, and the handle is a slight downward correction. Typically, the “cup and handle” is a bullish pattern and can be considered a continuation and reversal formation.
What does a cup and handle pattern mean?
A price forms this pattern as a retest of the previous high, causing selling pressure from traders who bought an asset near it. However, the decline doesn't happen as a straight dump but looks more like a "flag", meaning buyers remain interested in the asset despite its high value. After breaking above the resistance, the price skyrockets to new highs pushed by the overall bullish sentiment.
It’s worth considering the following rules when detecting Cup and Handle patterns:
Length: Generally, cups with longer and more "U"-shaped bottoms provide a stronger signal. Traders should avoid cups with sharp "V" bottoms.
Depth: Traders should avoid overly deep handles, as handles should form in the top half of the cup pattern.
Volume: Volume should decrease when the price declines and remain lower than average in the base of the bowl. It should increase as the price moves toward the recent high, confirming buyers' interest.
How to trade cup and handle
There are several ways to approach trading the cup and handle. The first one is for risky traders. You need to enter a buy trade on the breakout of the handle’s resistance trend line. In this case, a trader should set the Stop Loss order slightly below the handle’s trendline. A profit target will be at the resistance trend line, connecting two highs of the cup.
Alternatively, wait for the price to close above the resistance trend line, connecting two highs of the cup, and enter a buy trade. For this trade, a profit target will be determined by measuring the vertical distance between the bottom of the cup and the resistance trend line, connecting two highs of the cup. Your Stop Loss needs to be set right under this resistance trend line.
What is an ‘inverted cup and handle’?
An “inverted cup and handle” is a bearish pattern, triggering a sell signal. It looks like an upside-down cup and handle.
The inverted “cup and handle” is the opposite of the regular cup and handle. Instead of a “u” shape, it forms an “n” shape with the ascending handle. However, trading approaches used for inverted “cup and handle” are the same.
The Cup and Handle pattern is a bullish continuation or reversal price formation, often used to identify buying opportunities. To determine the cup and handle, follow price movements on a chart and look for the "u" shape and the downward handle. Some rules will help you find a valid Cup and Handle pattern relating to its length, depth, and the underlying asset's liquidity. An inverted “cup and handle” is used to identify selling opportunities, which is a sign of an upcoming bearish movement. This pattern moves in the opposite direction to the cup and handle, forming an "n" shape and an upward handle.
Questions about Cup and Handle pattern
What does a Cup and Handle pattern indicate?
A Cup and Handle is a chart pattern where the price movement of an asset resembles a “cup” followed by a downward trending price pattern. This drop, or “handle,” may signal a buying opportunity.
How to find a Cup and Handle pattern?
Consider a scenario where a price has recently reached a high after significant momentum but has since corrected. At this point, an investor may purchase the asset, anticipating it will bounce back to previous levels. The price then rebounds, testing the previous high resistance levels, after which it falls into a sideways trend. In the final leg of the pattern, the price breaks through the resistance level, soaring above the previous high.
What happens after a Cup and Handle pattern forms?
If a Cup and Handle forms and is confirmed, the price should increase sharply in short- or medium-term. If the pattern fails, this bull run would not be observed.
What is the target for Cup and Handle pattern?
The target of the Cup and Handle pattern is the height of the cup added to the breakout of the resistance trend line connecting the two highs of the cup.
How to start trading a Cup and Handle pattern?
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A triangle chart pattern is a consolidation pattern that involves an asset price moving within a gradually narrowing range.
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