There are so many chart patterns. One of these is the cup with a handle pattern.
Although relatively lesser well known, this is highly effective.
Its reliability is 65% and 68% on forex and stock, respectively.
It is not only effective for short-term traders but also position traders, swing traders, or active investors.
The cup with handle pattern is a bullish type of pattern.
It can occur when the price increases or decreases.
The bearish equivalent is the Inverted Cup with Handle pattern, but we will touch that later.
We will now discuss more about the cup with handle pattern and its inverse, and end with how to trade with this type of pattern.
Basic Form of Cup and Handle Pattern
The classic or the basic form of the cup with handle pattern is a continuous pattern with the most reliability.
It appears after an uptrend and depicts price consolidation.
The cup and handle pattern acts as a reversal or continuation signal depending on the price movement before the pattern formation.
For example, if the bullish cup with handle pattern forms after a bullish price move, we will consider it a continuation pattern.
But if the bullish cup with handle pattern forms after a bearish price move, we will surmise it to be a reversal pattern.
Structure of a Cup and Handle Pattern
The name “cup and handle” is such because the pattern makes a cup and a handle.
The cup and handle pattern initiates with a price decrease as the forex currency pair changes its direction.
This change is so minute and gradual that the price action forms a rounded bottom. This shape is intensified by the initial decrease and end of the increase in price being on the same level.
We can attribute the “handle” part to the bearish movement in price.
Inverted Cup with Handle
This is the bearish form of a cup ad handle pattern.
The inverse cup and handle pattern forms after a bullish trend.
Here, the top part of the “cup” is rounded.
As the bearish move ends, a bullish handle starts forming.
Cup and Handle Trading
It would be best to consider opening a trade once you have confirmed that a cup and handle pattern has formed.
Open a long trade if the pattern is bullish. Open a short trade if the pattern formed is bearish.
You should also create a stop-loss order when trading with a cup and handle pattern.
Take profits targets either on a distance equal to the size of the handle from the breakout point. Or on a distance equal to the size of the cup, again from the breakout point.
Keep a lookout for price action clues to gain the most advantage from your trade.
Bottom Line
In conclusion, we know that the cup and handle chart pattern is highly reliable and effective, so it is definitely worth using. The pattern also comes with an inverse, which signifies bearish movements, and is dealt with accordingly.
