How to trade cup and handle

Cup and Handle Pattern in Forex is a bullish continuation pattern therefore generates buy signals.

It forms during an uptrend as it marks a consolidation period followed by a breakout.

The cup indicates a pause in price trend and a breakout on the handle signals trend continuation.

Price in an uptrend drops for a while then rises again hitting the same level forming the cup. It then pulls back or moves in a channel forming a handle.

It again raises beyond the previous peak making a whole structure a shape of a Tea-cup

Cup and Handle Pattern in forex

There are 2 parts to the pattern: The cup & the handle

Formation of Cup and Handle Pattern

The Cup and Handle Pattern

In an uptrend,

The cup looks like a bowl or round bottom or some times it takes a shape of a V. As the cup completes, a trading range develops on the right-hand side and forms a handle.

The right high of the cup may be at the same level with the left or different with a small difference in height.

In addition,the handle may appear inform of the channel or a triangle but should not fall into the lower half of the cup.

As a rule of thumb, a cup with a longer length and width gives a stronger signal.

The handle is the most important part in this pattern since it gives a confirmation signal for the completion of the pattern. When price breaks on the handle, it gives a buy signal.

A breakout from the handle signals a continuation of the prior trend. Hence gives a buy signal to trade.

You can use  Trend lines to draw on price range to clearly mark the handle.

When the cup appears with a round bottom,

It indicates that price stabilized before rising and found support due to equal buying and selling pressure. The further rise of prices indicate more buying pressure than selling pressure.

On the other hand,

The V-shaped bottom indicates how buyers came in with a lot of pressure causing a sharp rise in prices on the right side of the cup.

 Pattern Confirmation

The Cup and Handle trigger signal is at the breakout of the handle.

The handle breakout acts as a confirmation of the pattern. When you identify the handle breakout, you can take a buy entry position.

Cup and Handle pattern Confirmation

From the above chart,

You see the Cup with Handle Pattern. The confirmation signal of the figure comes at the moment when the price action breaks the handle on the upper trendline.

This is shown with the purple circle on the chart.  A bullish candlestick closing above the trendline after price breakout on the handle.

How do you trade the Cup and Handle Pattern

The cup and handle pattern can either form in an uptrend as a continuation pattern or at the end of a downtrend as a reversal pattern. However it is common in an uptrend.

Steps to trade the cup and Handle Pattern in Forex

  1. When you spot the Cup and Handle pattern in an uptrend, expect a further price rally after the breakout at the handle. 
  2. Wait for the pattern to complete in order to avoid fake outs. Wait for the price Breakout on handle with a bullish candlestick. 
  3. Take position/buy.

NB: In case, The pattern forms at the end of a downtrend, expect, possible trend reversal. Do the same and wait for pattern confirmation at the handle breakout before you jump in.

Stop Loss and Profit Target Levels

Stop loss is placed slightly below the lower low/lowest point of the handle.

The profit target is got by measuring the vertical height of the cup and projecting that same distance upwards from the handle break out.

Example on how to trade the Pattern breakout

Let’s take a look at AUDCAD, Daily chart below;

From the chart above,

The confirmation is identified with a black circle after a breakout at the handle giving a buy signal.

Stop loss is set slightly below lowest point of the handle.

Meanwhile our target profit at height H. You measure the vertical height of the cup (H) and project the same distance (H) upwards from the handle break out.

NOTE: A cup and handle pattern at the end of a downtrend acts as a bullish reversal pattern signal. 

 The criteria for entry, stop-loss and profit target are exactly the same as when it is a continuation pattern .

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