CUP & HANDLE. How the pattern works☕️
✅This pattern is not as popular among traders as "Head and Shoulders", "Double Top" and other classic patterns of technical analysis. However, this does not mean that it is not so effective. In fact, the "Cup & Handle" pattern is in no way inferior to the above patterns in its reliability and, if used correctly, can bring considerable benefits to the trader.
✅Below we will look at how the "Cup & handle" is formed, what are the signs of authenticity of the formed pattern, and the trading strategy for it.
⚠️How the "Cup & Handle" formation is formed
The formation of this pattern occurs on an uptrend and is a sure sign of its continuation (subject to the conditions of authenticity of the pattern). In essence, it is a cup - an uptrend correction. The price reaches a strong resistance level, cannot overcome it, and smoothly rolls back, forming the left wall of the cup. Then it smoothly unfolds along the bottom and rises to test the level again. Having reached the level, it rolls back down again. This rollback should be much smaller than the previous one, and it forms a handle. The handle of the cup is very often formed in the form of a "Flag" pattern.
The "Cup & handle" pattern is considered fully formed when the price, having formed a "handle", returns up and breaks through the resistance level from which the pattern formation began
⚠️Confirmation of the truth of the "Cup & handle" pattern
There are several conditions, without which the formed pattern cannot be considered true. These are the conditions:
1️⃣To begin with, as mentioned above, for the formation of this pattern, it is necessary to have an uptrend. Without a trend, there is no point in looking for this formation on the price chart, because even if you find a drawing of an ideal cup with a handle, it will be just a drawing that has no meaning.
2️⃣The depth of the forming cup should not exceed 2/3 of the height of the previous uptrend. The optimal depth of the cup is within 1/3 - 2/3 of this value.
The depth of the forming handle should not exceed a value equal to ½ of the depth of the cup.
3️⃣The most reliable is the "Cup & Handle" pattern formed on daily or weekly timeframes. Of course, it can also be formed on hourly charts, but where the probability of its triggering is somewhat lower.
4️⃣The "Cup & handle" pattern should be confirmed by the indicators of the volume indicator. Volumes should grow at a time when the price is moving in the direction of an uptrend and fall when it decreases. Also, a sharp surge in volume should accompany the moment of breaking through the price level at the end of the formation of the figure.
🟢Trading strategy based on the "Cup & handle"
The entry into the position is carried out after the completion of the formation of the figure. It is recommended to wait for the price to close above the resistance line. To do this, you must constantly monitor the schedule in anticipation of the right moment.
There is also a strategy for opening a position on a pending order, in which case there is no
need to sit and wait for the completion of the figure. A pending order is placed at a level slightly above the resistance level (approximately 10 points) and is triggered if the figure is completed.
The target level for this pattern is the height of the cup, laid up from the resistance level. Therefore, we set the profit-taking level of TAKE PROFIT either at the target level or 10-15 points below it.
As for the STOP LOSS limit order, it should be placed at the level of the bottom of the handle (or slightly lower).
❗️In conclusion, I will say once again how important it is to correctly identify the "Cup and Handle" formation before you start trading on it. Carefully re-read the rules confirming this pattern. Try not to mess with the patterns formed on small timeframes. Take your time, be patient, and remember that the absence of open positions can also be considered an excellent position.
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