The cup and handle pattern is a powerful chart pattern used by traders to capture explosive breakout moves.
This pattern occurs regularly within financial markets.
As a trader, you should consider incorporating this pattern in your trading strategy.
This will enhance your market analysis technique.
In this article, I will help you learn how to trade the cup and handle chart pattern more effectively.
Let’s start…
What is the Cup and Handle Pattern?
The cup and handle pattern is a bullish reversal chart pattern.
It can occur after a price increase or a price decrease.
The pattern also has its bearish equivalent, the inverted cup and handle pattern.
This pattern can act as a reversal or continuation signal.
It all depends with the price move before the formation of the pattern.
If the bullish cup and handle occurs after a bullish price move, it will be considered a continuation.
If the bullish cup and handle occurs after a bearish price move, it will be considered a reversal pattern.
The Structure of Cup and Handle Pattern
This pattern was named cup and handle because it resembles a cup with a handle.
The pattern begins with a price decrease, during which the currency pair slowly changes its direction.
The change in direction is so gradual that the price action creates a rounded bottom on the chart.
The beginning of the price decrease and the end of the price increase are approximately at the same level.
The rounded structure created by this price movement forms the Cup portion of the pattern.
The handle is then formed by a bearish price move.
In most cases, the handle is locked within a small bearish channel on the chart.
The following graphic shows how the cup and handle formation looks like…
The above graphic shows both the cup and the handle part of the cup and handle chart pattern.
The cup part of the formation is formed by a combination of a price decrease and a price increase.
The handle part has been formed by a bearish price move.
In some cases, the start of the price decrease and the end of the price increase may diverge in terms of the level that they are supposed to be located at.
So, a small divergence between the tops of the two trends is admissible.
The handle is supposed to reach the midpoint of the cup and handle formation.
The decrease can stop a bit before the midpoint, or can go a bit below.
Cup and Handle Pattern in Forex
There are two types of cup and handle formations in forex depending on their potential.
These are the bullish cup with handle and the bearish cup with handle.
Let’s discuss them in depth…
Bullish Cup with Handle Pattern
What we’ve discussed so far is the bullish cup with handle chart pattern.
It begins with a price move in the bearish direction, which reverses gradually.
A bullish move begins, which moves to approximately the same level as the top of the bearish move.
The price action then starts to create the handle, which is a structure created by a bearish price move.
After confirming the pattern, the price is most likely to break the channel of the handle, starting a bullish move.
This move will have two targets.
The first target is equal to the size of the channel during the handle.
The second target is equal to the size of the cup beginning from the moment of the breakout.
Consider the following chart…
The above chart shows how the bullish cup and handle chart pattern is formed.
The bullish cup and handle chart pattern has been marked using blue lines.
The price action begins by making a gradual bearish move.
It is then followed by a gradual bullish move.
These two price moves creates the cup.
After the formation of the cup, the price action begun a new bearish move.
This move created the handle.
The two tops of the cup are at approximately the same level.
The formation of the handle also begins immediately after the formation of the cup.
The handle is sloping downwards because it was formed from a bearish price action.
After that, the price broke upwards.
It is now time for you to apply your targets.
The size of the first target should be equal to the size of the handle.
The size of the second target should be equal to the size of the cup.
Both should be applied from the moment of the breakout.
Consider the chart given below…
The above chart shows how to apply targets to the bullish cup and handle.
We have applied two targets marked as Target 1 and Target 2.
Target 1 is equal to the size of the handle.
Target 2 is equal to the size of the cup.
You can also see that the two targets have been applied from the moment of the breakout.
Bearish Cup and Handle Pattern
The bearish cup and handle chart pattern is an inverted version of the classic cup and handle chart pattern.
The bearish cup and handle formation begins with a bullish price move.
This bullish price move slows down gradually and eventually becomes bearish.
The handle for the bearish cup and handle slants upwards.
The confirmation of this pattern happens when the price action breaks the channel of the handle in a bearish direction.
You should also set targets for this type of formation.
The first target should be equal to the size of the bearish channel around the handle.
It should be applied downwards right from the moment of the breakout.
Consider the chart given below…
The above chart shows how a bearish cup and handle chart pattern is formed.
The price action begins by making a bullish move.
Once the bullish move ends, a bearish move begins.
These two price moves create the cup of the pattern.
If you consider the beginning point of the bullish move and the end point of the bearish move, they are at approximately the same level.
After the formation of the cup, the price action made a bullish move.
This bullish price move created the handle of the pattern.
This move did not last for long before reversing into a bearish direction.
This acted as a confirmation of the bearish cup and handle pattern.
Now, it’s time to place targets on the chart.
This is demonstrated in the chart given below…
The above chart shows how to place targets when trading the bearish cup and handle chart pattern.
The first target has been marked as Target 1.
It should be equal to the size of the bearish channel created around the handle.
See that the target has been applied downwards from where the breakout occurs.
The second target has been marked as Target 2.
It should be equal to the size of the cup.
The second target should also be applied downwards right from the moment of the breakout.
How to Draw the Cup and Handle Pattern
It is a bit tricky to draw the cup and handle chart pattern.
The reason is that the pattern cannot be drawn with a straight line.
The bottom or top of the pattern is rounded, hence, you should use a rounded drawing tool.
If you want to draw the bullish cup and handle chart pattern, take the two tops of the cup and stretch a curved line downwards.
Do this until the low of the pattern is formed.
You can then create a bearish handle on the right side of the cup.
If you want to draw a bearish cup and handle chart pattern, take the two bottoms of the pattern then stretch a curved line upwards.
Do this until the top of the pattern is formed.
You can then draw the shape of a bullish handle on the right side of the cup.
Congratulations, you will have drawn the pattern that you want!
Cup with Handle Signal
The cup and handle formation sends a specific signal to Forex traders.
When you spot it on your chart, it’s time to buy or sell the currency pair depending on the potential of the pattern.
The cup and handle chart patterns triggers a signal when it breaks out of the handle.
The handle breakout is a way of confirming the pattern.
Once you identify the handle breakout, just go ahead and plot the two targets for the pattern.
The first target should be equal to the size of the handle, while the second target should be equal to the size of the cup.
Consider the chart given below…
The above chart shows a cup with handle signal.
First, a cup and handle chart pattern is formed.
Next, the price action broke through the handle downwards
This has been shown using a red arrow marked as Cup with Handle Signal.
This acted as a confirmation of the bearish cup and handle formation.
Now that you’ve seen the bearish cup with handle signal, you can begin to pursue the bearish potential of the pattern.
How to Trade the Cup and Handle Pattern
You now know much about the structure of this chart pattern.
It’s now time for you to know how to implement it in your trading strategies.
Let me dig deeper and help you know how to trade this formation.
Here we go…
Timing your Entries
As we have stated above, the best time to enter or open a trade is when the pattern has been confirmed.
Remember, the confirmation of the pattern occurs when the price breaks the handle.
This break can be bullish or bearish.
If you are having a bullish cup with handle formation, you should see a bullish breakout through the handle.
This will give you an opportunity as the trader to go long.
If you are having a bearish cup and handle formation, you should see a bearish breakout through the handle.
This will give you an opportunity as a trader to go short.
Consider the chart given below…
The above chart shows the formation of a bullish cup and handle chart pattern.
The cup and the handle have been shown using blue lines.
After the formation of the handle, a bullish breakout through the handle occurred.
This has been shown on the chart using a red arrow marked as Bullish Breakout through the Handle.
This is followed by a significant increase in the price of the currency pair.
This is shown by the red arrow moving upwards.
This is a great opportunity for you as a trader to go long.
You only have to buy the currency pair as its price is currently increasing.
So, anytime you have a bullish cup and handle formation and a bullish breakout occurs, go long!
Consider the chart given below…
In the above chart, we have a bearish cup and handle chart pattern.
After the formation of the handle, a bearish breakout happened through the handle.
This has been shown using the red arrow marked as Bearish Breakout through the Handle.
This breakout was followed by a significant decrease in the price of the currency pair.
This has been shown by the red arrow moving downwards.
This gives you an opportunity as a trader to go short.
Since the currency price is decreasing, you can sell it.
Stop Loss Placement
Just like other chart patterns, you need to place a stop loss order when trading the cup and price pattern.
The stop loss order will prevent you from making losses, which can wipe out your trading account.
It works by exiting a trade if the price action begins to go against you.
A stop loss order helps you specify the amount of loss that you can tolerate.
If you are trading a bullish cup and handle formation, you should place a stop loss order just below the lower level of the handle.
If you are trading a bearish cup and handle formation, you should place a stop loss order just above the upper level of the handle.
Consider the chart given below…
In the above chart, we have a bullish cup and handle formation.
The position at which the price breaks through the handle has been shown.
The best place to add your stop loss order has also been shown.
This is the lowest level of the handle and it has been shown with a red line marked Stop Loss.
This will prevent you from incurring more losses in case the price reverses in a bearish direction.
It will help you exit the trade, hence, you will not incur a loss beyond that level.
Now, consider the following chart…
In the above chart, we have a bearish cup and handle price chart.
The position at which a breakout through the handle occurs has been shown.
The price then begins a bearish move.
The position at which you should place your stop loss order has been shown.
This is the small red horizontal line marked as Stop Loss.
This will help you exit the trade automatically once it begins to go against you.
Take Profit Target
When trading the cup and handle price pattern, your take profit targets should correspond to the two targets that we mentioned earlier.
The first take profit target should be located at a distance that is equal to the size of the handle.
Note that you should begin to measure the distance right from the breakout point.
After completing this target, you can begin to pursue the next target.
The second target should be located at a distance that is equal to the size of the cup.
It should also be applied right from the point of momentum breakout.
You can also choose to stay in the trade as long as the price is trending in your favor.
You don’t have to exit the trade when the price action is moving in your favor, showing the potential of adding more profit to your trade.
So, you can watch the price action clues so as to extend your gains from the trade.
Consider the chart given below…
The above chart shows how to trade a bullish cup and handle price chart.
The pattern is confirmed at the position pointed by a green arrow marked as Confirmation.
You should then buy the currency pair after the candle closes above the handle.
This has been shown by the green arrow marked Buy.
The next step should be for you to set your take profit targets.
These have been shown using the magenta arrows running vertically.
The first place to take your profit has been marked as Target 1.
This target should be equal to the size of the handle.
The second position to take your profit has been marked as Target 2.
This target should be equal to the size of the cup.
Note that you have the option of closing your trade immediately you reach your second target, that is, Target 2.
However, the price is still moving in your favor, that is, upwards.
So, it will be good for you to stay in the trade for further profit.
If so, you can close the trade immediately it hits the point marked as Close.
This is the point where the price reverses and begins to move in a bearish direction.
Holding onto the trade may make you incur some loss.
Let’s see how you can take your profits when trading the bearish cup and handle price pattern…
In the above chart of a bearish cup and handle price pattern, the profit targets have been shown using the two magenta lines.
Note that the profit targets have been applied downwards from the breakout point.
The reason is that we are dealing with a bearish cup and handle price pattern.
In the bullish cup and handle, the profit targets were applied upwards.
The first target is equivalent to the size of the handle, while the second target is equivalent to the size of the cup.
As you can see, the price action managed to reach both profit targets.
You can close the trade immediately the price action hits your second target, that is, Target 2.
Before reaching the Target 2, the price action experienced a pullback, that is, a weak bullish move.
See it as a test zone.
It is just testing the price action to see whether the bearish trend is strong enough.
After the test zone, the price action resumed its downward trend, meaning that the bearish move is strong.
Conclusion:
This is what you’ve learned…
- The cup and handle is a chart pattern with a bullish pattern.
- The pattern is made up of two parts, a cup and a handle.
- The cup is formed by a bearish direction that gradually changes direction.
- The handle is formed by a bearish price action that occurs after the formation of the cup.
- These two elements create a pattern that looks like a cup with a handle.
- The cup and handle price pattern has its bearish equivalent known as the Inverted cup and handle formation.
- The pattern is confirmed when the price action breaks out of the handle.
- If you have a bullish cup and handle, wait for a bullish confirmation then go long.
- If you have a bearish cup and handle, wait for a bearish confirmation and go short.
- For a bullish pattern, place your stop lows order below the lowest point of the handle.
- For a bearish pattern, place your stop loss order above the highest point of the handle.
- In the bullish cup and handle, the profit targets should be applied upwards.
- In the bearish cup and handle, the profit targets should be applied downwards.
- Note that in both cases, the profit targets should be applied right from the breakout point.
- If the price action is still moving in your favor, stay in the trade to gain more profit.