How the Cup and Handle Pattern Works

cup and handle reversal

Draw the extension tool from the cup low to the high on the cup’s right, and then connect it down to the handle low. If the price oscillated up and down several times within the handle, a stop-loss might also be placed below the most recent swing low. While the price is expected to rise, that doesn’t mean it will. The price could increase slightly and then fall; it could move sideways or fall right after entry. It should not drop into the lower half of the cup, and ideally, it should stay in the upper third. This is the H4 chart of the AUD/USD Forex pair for Sep 3-21, 2016.

  • Generally, cups with longer and more «U» shaped bottoms, the stronger the signal.
  • The longer and rounder the bottom, the stronger the signal.
  • The buy signal is confirmed when the stock breaks above the resistance level that capped the uptrend during the handle formation.
  • The pattern’s formation may be as short as seven weeks or as long as 65 weeks.

If you trade a bullish Cup with Handle pattern, you should place your stop loss order below the lower level of the handle. If you trade a bearish Cup with Handle your stop loss order should be placed above the upper level of the handle. When we get this indication, we can buy or sell the Forex pair depending on the potential of the pattern. As we said, the classic cup and handle pattern has its bearish equivalent cup and handle reversal – the bearish Cup & Handle, which is a mirror image of the standard Cup & Handle. This is the H1 chart of the most traded currency pair – EUR/USD. In the middle of the image you see a bullish Cup and Handle pattern, which is illustrated with the blue lines on the graph. Sometimes, the beginning of the decrease and the end of the increase could diverge in terms of the level they are supposed to be located at.

Cup and handle patterns in forex

There is no one perfect solution for everyone, so it’s important to find strategies that fit your personality and risk tolerance levels. There are many different types of trading patterns that traders can study to help them make better investment decisions so they benefit from trends in the market. The cup-and-handle pattern is just one of these and should not be used in isolation. A cup and handle pattern can fail on any timeframe of price chart from as short as a 1-minute price chart to as high as weekly or monthly charts.

The first target of the pattern equals to the size of the bearish channel around the handle, applied downwards starting from the moment of the breakout. The second target equals to the size of the cup, applied downwards starting from the moment of the breakout. A profit target is determined by measuring the distance between the bottom of the cup and the pattern’s breakout level and extending that distance upward from the breakout. For example, if the distance between the bottom of the cup and handle breakout level is 20 points, a profit target is placed 20 points above the pattern’s handle. Stop-loss orders may be placed either below the handle or below the cup depending on the trader’s risk tolerance and market volatility.

Trading Strategy #2: Pullback Entry

The theory behind the cup and handle pattern is that if the price tried to drop but then rebounded, there must be strong buying momentum behind the asset to continue moving higher. This could attract traders to open a position at the price rise, or at least avoid opening a short position against it. This article will explore how to identify and trade the cup and handle pattern in various financial markets.

cup and handle reversal

If the pattern is bullish, the signal should be a bullish breakout through the handle. If the pattern is bearish, take the two bottoms of the cup and stretch a curved line upwards until the rounded part reaches the top of the pattern. Take the right side of the cup afterwards and draw the shape of the bullish handle. After the price breaks the handle downwards, we see the creation of a new bearish move. The bearish Cup & Handle starts with a bullish price move, which gradually slows down and turns into a bearish move. However, when the handle is of proper proportions to the side of the cup, a breakout that goes higher than the handle is an indication of a rise in price. Furthermore, it is essential to note that this isn’t always the case, and investors should use some measures to mitigate losses when putting money into these types of patterns.

Cup and Handle chart pattern: Where do you enter your trade?

Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. So the next time you’re planning to trade the cup and handle, make sure you look at how much volume has been traded during the decline. You should keep in mind that this pattern can also act as a bullish continuation pattern that marks the beginning of a new uptrend.

  • If the pattern is bullish, take the two tops of the cup and stretch a curved line downwards until the rounded part reaches the low of the pattern.
  • “Your stop loss should be placed at a level where if the market reaches it, your trading setup is invalidated”.
  • A V-bottom, where the price drops and then sharply rallies, may also form a cup.
  • The best strategy is to use this indicator as a way to identify potential reversal signals.
  • In most cases bulls will take the control after the formation of the handle and the price will go up after the handle resistance breakout.
  • Remember that you should always use your knowledge and risk appetite to decide if you are going to trade based on ‘buy’ or ‘sell’ signals.

However, a small discrepancy between the tops of the two trends is admissible. If you have to argue your way mentally into believing the shape is an inverted cup, it’s not an inverted cup.

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