Forex education

Anatomy Of A Cup

Now, let’s revisit the same chart using the logic of selling the supply or upper resistance line on the chart. The breakout should produce significant volume and price expansion. On a 5-minute time frame, the handle is made up of at least 4 candlesticks but no more than 10.

cup handle formation

Shares and stock indices with lots of upward momentum prior to the cup and handle forming tend to produce the most favourable cup and handle patterns for trading. In this case, traders may focus on stocks or indexes that saw strong percentage advances heading into the cup and handle pattern. The price will likely continue in that direction though conservative traders may look for additional confirmation. The target can be estimated using the technique of measuring the distance from the right peak of the cup to the bottom of the cup and extending it in the direction of the breakout. A common stop level is just outside the handle on the opposite side of the breakout. The Inverted Cup and Handle is the bearish version that can form after a downtrend.

Height Averages Of The Cup And Handle Pattern

The following material will outline the unique structure of this pattern as well as a strategy for successfully trading it. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information.

  • Once you learn what is Cup and Handle pattern you have no more excuses not to have a chance to succeed in trading.
  • Both groups are now targeted for losses or reduced profits, while short-sellers pat themselves on the back for a job well done.
  • So, the first Cup and Handle rule is that you need to have a previous trend.
  • An chart will also tell you in real time how volume is running in comparison with typical level at that time of the trading session.
  • It’s the starting point for scoring runs and winning the investing game.

The cup and handle is considered a bullish signal, with the right-hand side of the pattern typically experiencing lower trading volume. The pattern’s formation may be as short as seven weeks or as long as 65 weeks. Price fluctuates in a narrow band with no clear trend.Triangles & WedgesTriangles and wedges can be powerful continuation or reversal patterns, depending on their shape. Technical Promissory Note traders looking at stock prices over a longer time period will have no trouble spotting a cup and handle pattern. Before jumping in, take the time to look at the volume behind the trading action and establish the strength of the pattern. Setting entry and exit targets is the easy part, provided the cup and handle pattern culminates in a bullish continuation like you expect it to.

How To Trade The Cup And Handle

If the pattern is bearish, sell when the price breaks the handle downwards. We have discussed many different types of chart patterns to date. Today we will fibonacci sequence talk about a somewhat lesser known pattern but one that is still highly effective. I am referring to the Cup and Handle Pattern for Forex trading.

The cup typically takes shape as a pull back and subsequent rise, with the candlesticks in the center of the cup giving it the form of a rounded bottom. The handle is made up of downward-sloping price action that soon breaks out above the upper resistance line to indicate the continuation of the original bullish trend. Cup and handle patterns are also traded in the forex market, especially by day traders​​. When intraday trading, cup and handles tend to perform better during active times of a specific currency pair. When the forex markets are not open, the pair tends to be quieter, which means less movement, and it also means that intraday cup and handle patterns will not form as strongly. This is because there is not sufficient momentum to fuel a breakout and bullish trend.

How To Identify The Cup And Handle Pattern

As the shape of the cup is completed, expect the handle to emerge. As the handle declines and concludes, price reverses, moving again to the upside and setting up as a breakout from previous resistance. Identifying support and resistance levels is key in assessing a potential cup and handle pattern, as is monitoring volume.

After the initial decline, the stock will find support as bears come back in to capitalize on the lower price. However, bears and bulls will battle at this level, causing sideways movement for a period of time . Here’s how to recognize the formation of a cup and handle pattern, what it signifies and how to trade one with confidence.

cup handle formation

Your first take profit target should be located on a distance equal to the size of the handle, starting from the breakout point. If this target is completed, you can then start pursuing the next target. The second target is located on a distance equal to the size of the cup, applied again from the moment of the breakout. As we point out earlier, you would prefer to open a trade after confirming the Cup with Handle pattern. If the pattern is bullish, the signal should be a bullish breakout through the handle.

What should you do if volume on breakout day is much lighter than usual? Light volume in the market in general may also be a factor. Also consider that the breakout may have started later in the day.

Trading The Inverted Bearish Reversal

IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. If you’re not ready to take on the live markets, you can open a risk-free demo account to identify the cup and handle pattern and practice your trades.

Recognizing Cup And Handle Patterns

The Cup with Handle pattern has its bearish equivalent, and is referred to as an Inverted Cup and Handle formation. This is the hourly chart of the USD/CAD Forex pair for March 25-30, 2016. The image illustrates the way a bearish Cup and Handle pattern could be traded.

Prices then break the uptrend established by the right side of the cup, thus creating the handle. Prices reverse in a “V” formation rising until the high established by the right side of the cup. Kirkpatrick & Dahlquist state that typically volume decreases on the left side of the cup and then increases Balance of trade on the right side of the cup (2010, p. 325). As the name of the formation implies, the cup and handle formation looks a lot like a cup with a handle. The beginning of the formation will be the left side of the cup. At the top edge of the cup, the handle will then move down towards the right at an angle.

There aren’t a lot of fancy indicators or technical tools needed to spot the pattern. Additionally, the handle needs to stay in the upper half of the cup and not drop into the lower half of the cup’s price range. cup handle formation For example, if the cup forms between a price range of $1.0 to $2.0, then the handle needs to form within $1.50 to $2.0. If the handle pushes too low, then it will be ineffective at trapping short sellers.

The false breakout in the handle on August 13 occurs on low trading volume, demonstrating the importance of using trading volume as a method of confirming the breakout. Estimating the extent of the continuation movement by measuring the distance between the base of the cup and the breakout slightly underestimated the movement. When the pattern is complete, a long trade could be taken when the price breaks above the handle. However, some traders make the mistake of assuming that once a U-shape forms, the price will drop to form a handle. It may not, so you should ideally avoid trading the pattern until it has fully formed, in order to confirm the trend.

Author: Anzél Killian

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