Cup and Handle pattern guideline (PDF)

The cup and handle pattern is a widely used tool in technical analysis. Forex Traders may apply this pattern in different types of financial markets (for example forex, cryptocurrencies..). This type of pattern assists investors in determining the market’s direction and forecasting future price fluctuations. CFD Traders need to wait for the construction of the pattern to be completed before executing it, in order to avoid making bad decisions that will cost them a huge amount of money. In this course, we will discuss this pattern in detail and its inverse version which is called the inverted cup and handle pattern.

Cup and Handle pattern

What is Cup and handle pattern ?

A cup and handle are classified as a bullish pattern, unlike other chart patterns. It does not perform similarly in both bullish and bearish. However, the cup and handle get their name from the fact that it resembles a teacup when viewed from the side. In fact, the cup and handle chart consists of four main structural elements: The descending Slope, the bottom of the cup, the ascending Slope, and the handle. The total length of the cup with handle should be at least seven weeks, depending on the asset and the period you’re operating with.

Moreover, this pattern can be detected in both short and long time periods. The handle of the cup should be smaller than the cup (less than one-third of the cup’s size). Besides, the pattern is deemed complete when the stock or forex price passes beyond the handle. After the handle has formed, the price movements cross the breakout point and move above to form the bullish signal.

It exists two types of this pattern :

  • The regular cup and handle chart
  • The inverted cup and handle chart
Cup and handle pattern

It exists a prior uptrend preceding the downtrend movement of this chart pattern.

How is cup and handle formed?

Weaker holders are those that purchased too late in the recent uptrend, so they found themselves preferring small losses instead of making high profits. When the share price gets closer to the acquisition price, those holders will sell. However, when investors stop selling fiercely and start to buy, the bottom of the cup begins to form. After the construction of the bottom, the price of the security starts to move higher in order to construct the right side of the cup. Besides, at the bottom of the cup, big investors have stopped their selling and have begun purchasing. It means that the selling pressure ends while the purchase pressure begins to rise. The final phase, where the handle emerges, is where the last battle between buyers and sellers takes place. The resistance line links the highest points of the cup and handle chart.

In fact, the confirmation of this pattern comes when the stock price passes above the resistance level and starts moving upward.

How do you trade cup and handle pattern ?

Price target

Depending on the size of the cup, you can determine the price target of the cup and handle pattern by measuring the height of the handle and adding it over the resistance line.

Stop-loss

Due to the possibility of false breakout and losing opportunities, Forex traders need to control their risk by placing a stop loss. In the regular cup and handle pattern, investors place their stop loss below the lowest point of the handle.

To make a profit with the cup and handle pattern, traders need to confirm the breakout after the handle is completely formed. Moreover, the cup and handle, like most other technical indicators, should be utilized in conjunction with different signals and indicators. The cup and handle chart is appropriate for a wide range of markets: Forex market, cryptocurrencies, stocks, shares, etc. Moreover, this pattern tool seems simple to use and applies to professional traders.

How do you trade inverted cup and handle patterns?

In the inverted cup and handle pattern, the cup form seems reversed. This chart pattern displays a prior downtrend preceding the uptrend movement of this chart pattern. Unlike the cup and handle pattern, the inverted cup and handle are classified as a bearish pattern. Investors apply this chart pattern to detect selling opportunities. Moreover, before the breakout point, the handle climbs a little higher. After that, it continues the downtrend. In this inverted cup and handle pattern, after the price drops out of the support line, traders could buy. The inverted cup and handle pattern shows the lack of purchasing pressure during the period studied. This pattern might appear with both the daily and weekly patterns. When trading inverted cup and handle pattern, traders set the stop loss above the handle.
Invented cup and handle pattern

How reliable is the cup and handle chart ?

Despite how reliable is the cup and handle pattern, it does have certain limitations that influence the performance of traders while making their investment decisions. Firstly, it takes a large time to fully form the cup and handle forex chart . This can result in late decision-making. Secondly, the possibility of false signals for investors because of the difficulty to determine the length and depth of the Cup and Handle chart. Therefore, it might provide traders with misinformation. Thirdly, for new traders, it is a challenging pattern to spot.

Considering the obvious limitations, investing decisions based simply on the Cup and Handle chart is not always accurate. Hence, traders need to overcome this and reach better results by combining it with some other technical analysis tools.
For example Momentum Oscillators, Japanese Candlestick Patterns

Conclusion

In conclusion, the cup and handle chart is one of the most significant chart patterns for earning money in the stock market. Despite the efficiency of this chart pattern, it presents certain limitations. Hence, it is preferred to not execute any trading decision entirely on the basis of this pattern only. It is better to combine with other technical analysis tools.

Key takeaways

  • The cup with handle is a popular trading tool used by investors in almost all financial markets.
  • The cup with handle reflects an inverted or a regular cup and handle chart of the price action .
  • The descending slope , the bottom of the cup , the ascending slope, and the handle form the cup with handle chart pattern.
  • The inverted cup and handle pattern is the reversed form of the cup and handle.
  • Like others, technical analysis indicators, the cup and handle chart presents certain limitations.
  • Investors need to wait until the handle forms, to start their trading.