BITCOIN :CAP AND HANDLE PRICE ACTION PATTERN/
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Gold Spot / U.S. Dollar
CAP AND HANDLE PRICE ACTION PATTERN
By TaherJalili
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Updated Aug 14, 2020
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Aug 12, 2020
The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout.
The cup and handle pattern occurs in both small time frames, like a one-minute chart, and in large time frames, like daily, weekly, and monthly charts. It occurs when there is a price wave down, followed by a stabilizing period, followed by a rally of approximately equal size to the prior decline. It creates a U-shape, or the "cup" in our "cup and handle." The price then moves sideways or drifts downward within a channel—that forms the handle. The handle may also take the form of a triangle.
The handle needs to be smaller than the cup. The handle should not drop into the lower half of the cup, and ideally, it should stay in the upper third.
As its name implies, there are two parts to the pattern: the cup and the handle. The cup forms after an advance and looks like a bowl or rounding bottom. As the cup is completed, a trading range develops on the right-hand side and the handle is formed. A subsequent breakout from the handle's trading range signals a continuation of the prior advance.
A cup and handle chart may signal either a reversal pattern or a continuation pattern. A reversal pattern occurs when the price is in a long-term downtrend, then forms a cup and handle that reverses the trend and the price starts rising. A continuation pattern occurs during an uptrend; the price is rising, forms a cup and handle, and then continues rising.
Entering a Cup and Handle Trade
Wait for a handle to form. The handle often takes the form of a sideways or descending channel or a triangle. Buy when the price breaks above the top of the channel or triangle. When the price moves out of the handle, the pattern is considered complete, and the price is expected to rise.
While the price is expected to rise, that doesn't mean it will. The price could rise a little and then fall, it could move sideways, or it could fall right after entry. For this reason, a stop-loss is needed.
Picking a Target or Profitable Exit
Whatever the height of the cup is, add that height to the breakout point of the handle. That figure is the target. For example, if the cup forms between $100 and $99, and the breakout point is $100, the target is $101.
Sometimes the left side of the cup is a different height than the right. Use the smaller height, and add it to the breakout point for a conservative target. Or use the larger height for an aggressive target.
A Fibonacci extension indicator may also be used. Draw the extension tool from the cup low to the high on the right of the cup, and then connect it down to the handle low. The one-level, or 100%, represents a conservative price target, and 1.618, or 162%, is a very aggressive target. Therefore, targets can be placed between one and 1.618.
If you're day trading and the target is not reached by the end of the day, close the position before the market closes for the day. A trailing stop-loss may also be used to get out of a position that moves close to the target but then starts to drop again.
Setting a Stop-Loss
A stop-loss order gets a trader out of a trade if the price drops, instead of rallying, after buying a breakout from the cup and handle formation. The stop-loss serves to control risk on the trade by selling the position if the price declines enough to invalidate the pattern
Place a stop-loss below the lowest point of the handle. If the price oscillated up and down a number of times within the handle, a stop-loss might also be placed below the most recent swing low.
Since the handle must occur within the upper half of the cup, a properly placed stop-loss should not end up in the lower half of the cup formation.
If the stop-loss is below the half-way point of the cup, avoid the trade. Ideally, the stop-loss should be in the upper third of the cup pattern.
By having the handle and stop-loss in the upper third (or upper half) of the cup, the stop-loss stays closer to the entry point, which helps improve the risk-reward ratio of the trade. The stop-loss represents the risk portion of the trade, while the target represents the reward portion.
Considerations
Traditionally, the cup has a pause, or stabilizing period, at the bottom of the cup, where the price moves sideways or forms a rounded bottom. It shows the price found a support level and couldn't drop below it. It helps improve the odds of the price moving higher after the breakout.
A V-bottom, where the price drops and then sharply rallies may also form a cup. Some traders like these types of cups, while others avoid them. Those that like them see the V-bottom as a sharp reversal of the downtrend, which shows buyers stepped in aggressively on the right side of the pattern. Opponents of the V-bottom argue that the price didn't stabilize before bottoming, and therefore, the price may drop back to test that level. Ultimately, if the price breaks above the handle, it signals an upside move.
If the trend is up, and the cup and handle forms in the middle of that trend, the buy signal has the added benefit of the overall trend. In this case, look for a strong trend heading into the cup and handle. For additional confirmation, look for the bottom of the cup to align with a longer-term support level, such as a rising trend-line or moving average.
If the cup and handle forms after a downtrend, it could signal a reversal of the trend. To improve the odds of the pattern resulting in a real reversal, look for the downside price waves to get smaller heading into the cup and handle. The smaller down waves heading into the cup and handle provide evidence that selling is tapering off, which improves the odds of an upside move if the price breaks above the handle.
Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation or the less upside potential.
Cup: The cup should be “U” shaped and resemble a bowl or rounding bottom. A “V” shaped bottom would be considered too sharp of a reversal to qualify. The softer “U” shape ensures that the cup is a consolidation pattern with valid support at the bottom of the “U”. The perfect pattern would have equal highs on both sides of the cup, but this is not always the case.
Cup Depth: Ideally, the depth of the cup should retrace 1/3 or less of the previous advance. However, with volatile markets and over-reactions, the retracement could range from 1/3 to 1/2. In extreme situations, the maximum retracement could be 2/3, which conforms with Dow Theory.
Handle: After the high forms on the right side of the cup, there is a pullback that forms the handle. Sometimes this handle resembles a flag or pennant that slopes downward, other times it is just a short pullback. The handle represents the final consolidation/pullback before the big breakout and can retrace up to 1/3 of the cup's advance, but usually not more. The smaller the retracement, the more bullish the formation and significant the breakout. Sometimes it is prudent to wait for a break above the resistance line established by the highs of the cup.
Duration: The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The handle can be from 1 week to many weeks and ideally completes within 1-4 weeks.
Volume: There should be a substantial increase in volume on the breakout above the handle's resistance.
Target: The projected advance after breakout can be estimated by measuring the distance from the right peak of the cup to the bottom of the cup.
Si bien se espera que el precio suba, eso no significa que lo haga. El precio podría subir un poco y luego caer, podría moverse hacia los lados, o podría caer justo después de la entrada. Por esta razón, se necesita un stop-loss.
Elegir un Objetivo o Salida Rentable
Cualquiera que sea la altura de la copa, agregue esa altura al punto de ruptura del mango. Esa cifra es el objetivo. Por ejemplo, si la copa se forma entre $100 y $99, y el punto de ruptura es $100, el objetivo es $101.
A veces, el lado izquierdo de la copa tiene una altura diferente a la derecha. Use la altura más pequeña y agréguela al punto de ruptura para un objetivo conservador. O use la altura más grande para un objetivo agresivo.
Un indicador de extensión de Fibonacci también se puede usar. Dibuja la herramienta de extensión desde la taza baja a la alta a la derecha de la taza, y luego conéctala a la manija baja. El nivel único, o 100%, representa un objetivo de precio conservador, y 1.618, o 162%, es un objetivo muy agresivo. Por lo tanto, los objetivos se pueden colocar entre uno y 1.618.
Si está operando día y el objetivo no se alcanza al final del día, cierre la posición antes de que el mercado cierre el día. También se puede usar un stop-loss trasero para salir de una posición que se mueve cerca del objetivo, pero luego comienza a caer nuevamente.
Establecer un Stop-Loss
Una orden de stop-loss saca a un comerciante de una operación si el precio cae, en lugar de recuperarse, después de comprar una ruptura de la copa y la formación de manijas. El stop-loss sirve para controlar el riesgo en el comercio vendiendo la posición si el precio disminuye lo suficiente como para invalidar el patrón
Coloque un stop-loss debajo del punto más bajo del mango. Si el precio osciló hacia arriba y hacia abajo varias veces dentro del mango, también se puede colocar un stop-loss por debajo del mínimo de swing más reciente.
Dado que el mango debe ocurrir dentro de la mitad superior de la copa, un stop-loss colocado correctamente no debe terminar en la mitad inferior de la formación de la copa.
Si el stop-loss está por debajo del punto medio de la copa, evite el intercambio. Idealmente, el stop-loss debe estar en el tercio superior del patrón de copa.
Al tener el mango y el stop-loss en el tercio superior (o mitad superior) de la copa, el stop-loss se mantiene más cerca del punto de entrada, lo que ayuda a mejorar la relación riesgo-recompensa del comercio. El stop-loss representa la parte de riesgo de la operación, mientras que el objetivo representa la parte de recompensa.
