What is cup and handle pattern and how to trade it?
Quite often on the chart you can see the pattern of a cup with a handle. Because of its simplicity, traders rarely pay attention to this pattern, but in vain, as a simple figure hides great potential. In this article we will take a look at it:
what does cup and handle pattern mean?
how does cup and handle pattern work?
how to identify and trade cup and handle pattern?
The cup and handle pattern – this term was chosen because of the similarity between this type of utensils and what the trader sees on the chart. The figure in the technical analysis is considered a model of trend continuation. It is usually formed in the middle of an upward or downward trend and looks like a correction area consisting of two elements: an arc that looks like a cup, and a short descending area that looks like a handle. The chart below shows an example of the figure.
In the process of forming the figure creates maxima (cup boundaries), connecting which we obtain the level of resistance. In the event of a breakout and consolidation above the resistance line, the upward trend continues.
There is also a bearish model, the appearance of which is characteristic of the downward trend. It's called an inverted cup and handle pattern.
In this case, the minima formed by the figure create the level of support.
In the event of a breakout and consolidation below the support line, the downward trend continues.
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How to trade the cup and handle?
The picture below shows a conditional example. The price moves in an upward trend, then at some stage there is resistance, there is a correction, then the price returns to the level where it meets resistance again, but with less force. As a result of the next approach there is a breakout of the resistance level and the continuation of the trend.
There are several methods of trading this structure. Some traders open their positions during the breakout of the resistance line, more conservative traders wait for confirmation of the breakout and open their positions after the level retest. According to the rules, stop loss is put immediately behind the handle, or at the breakout level, depending on your risk management. Take profit is set equal to the height of the cup.
The rules for the figure of an inverted cup with a handle are absolutely identical. In this case, you should expect a breakout of the support line, and open your short positions after the breakout or retest level.
In conclusion, let's highlight the main points:
- the cup and handle is a figure of continuation of a trend by means of which it is possible to find opportunities for opening of long or short positions;
- the figure consists of two elements – a cup and a handle;
- opening a position happens during a breakout or level retest;
- stop loss is placed below the minimum of the handle or breakout level depending on your risk management;
- to set the take profit, you need to measure the depth of the cup and determine this distance from the breakout point.
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