2022.09.09
2019.04.03 Study the features of the Cup and Handle pattern
Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/
The article covers the following subjects:
- What does a Cup and Handle pattern look like?
- Targets to trade Cup and Handle pattern
- Work strategy under the Cup with Handle pattern
At first sight, working during a trend recovery seems to be a less enthralling activity than identifying a trend reversal. If an attempt to catch falling knives was crowned with success, a trader gets an adrenaline rush and recalls the “nothing ventured, nothing gained” principle. At the same time, trading in a current trend develops the skills of self-control and market reading, which are often more useful than emotionality and accidental earnings.It is hardly easier than trading at reversals: identifying the exhaustion of correction movement is as hard as identifying a trend reversal. At the same time, the combination of both approaches betters financial results.
If a counter-trend pattern works but the market slips into consolidation instead of changing a direction, we should just think about why it happens. The bears’ power might not be enough to take over control in an ascending market, right? If so, it’s time to recall trading strategies based on the recovery of a previous trend. A typical example would be the Cup with Handle pattern by Thomas Bulkowski, the author of the bestselling Encyclopedia of Chart Patterns. The pattern does look like a frying pan with a handle on the left and it consists of 2 consecutive stages.
What does a Cup and Handle pattern look like?
The Cup and Handle pattern occurs during an uptrend. It is a bullish continuation pattern. The formation resembles a teacup with a handle where the Cup is in the shape of a "U", followed by a short pullback and the trend restoration, the Handle. The Cup’s highs must be at roughly equal levels. That is where the resistance is; if bulls break it out, they should continue the uptrend. The bordersof the Cup and the Handle are the lows of the bars when the price reached the pattern’s tops. They help you draw the pattern in the chart. According to Thomas Bulkowski, the author of “EncyclopediaofChart Patterns”, if the left side of the Handle is higher than its right side, the Cup and Handle efficiency increases.
The technical requirements for the pattern are a price trend and the time the pattern has been forming.
In the course of the first Introductory stage, a reversal pattern forms. Normally, it’s the 1-2-3 pattern. The second top is lower than the first top here, which allows drawing a descending trend line. Theoretically, a bullish market is supposed to reverse and go down.In fact, it doesn’t go down and slips into consolidation instead. It’s the second stage of pattern formation called “the stage of Hole”.
The author thinks that a mandatory condition for a real upward breakout is the projection of the Hole stage exceeding the projection of the Introductory stage by two times or more. If this condition isn’t observed, there might be a false breakout. When drawing vertical lines R and 2R, the extremums and diagonal support and resistance are used.
Cup and Handle pattern on the daily chart of USD/NOK
According to technical authors, including William J. O'Neil who wrote in 1988 his classics "How to Make Money in Stocks," The Cup may be as short as 7 weeks or as long as 65 weeks, the Handle forms during one or two weeks. The asset should be about 30% up before the correction starts. It is all relevant for the stock market; in Forex, such a strong price rise may take years. So, I suggest that one may apply the pattern after a 7-15% rally. The USD/NOK daily chart shows an 11% rise.
An important feature is the trading volume that should be growing in the area of the Cup’s bottom. It will prove that big sellers are going to defend their long positions. Thomas Bulkowski notes that the faster the Handle is forming, the more efficient is the pattern. His research suggests that the targets with the size equal to the distance between the Cup’s bottom and its right-sided high work out in 50% of cases in a bullish market and in 27% - in the bearish. If you reduce the target profit by half, chances for success will be much higher, at 76% and 55% respectively.
The Cup with Handle pattern on AUD/JPY daily chart
A successful breakout of resistance is a signal for opening a position in the framework of a strategy based on the recovery of a bullish trend. A long position can be opened at a breakout price or at a closing price of the breakout bar. A protective stop order is placed near the low of the latest price fluctuation. A trade should be closed using Profit Factor or by moving 2R projection to the stop loss point.
Targets to trade Cup and Handle pattern
The simplest way to trade the Cup and Handle pattern is entering a long trade at the resistance breakout, drawn according to the Cup’s highs after the Handle has been formed. A stop loss is put at the low of one of the previous corrections, target profits have been described above. However, inside the Cup, there may be the same pattern but a smaller one. In this case, one may enter a buy trade at the right-sided high of the smaller cup.
Work strategy under the Cup with Handle pattern
Thomas Bulkowski pays great attention to the fact that the projection of the Hole stage shall exceed the vertical line of the Introductory stage by two or more times. If this rule hasn’t been observed, the pattern doesn’t work and the risk of losing money in such a trade increases. As we can see from the example of GBP/JPY, the depth of retracement in an ascending trend isn’t big enough for us to count on its fast recovery in the future.
Another evidence that you discovered the right pattern is the trading volume that is lowering at the stage of the Handle’s formation. It signals that big buyers are testing the power of their opponents.If there are no strong opponents, one may safely enter a buy position.
False pattern “Cup with Handle” on the daily chart of GBP/JPY
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In general, the pattern we’ve examined may be an efficient supplement to the arsenal of strategies based on a current trend recovery. The understanding of bears’ weakness may improve individual trading results. What’s more, the pattern develops self-control and the skill of market reading, which can be really important to traders’ “vital capacities” at Forex.
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Price chart of GBPJPY in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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