What is the Cup and Handle Pattern?
The Cup and Handle Pattern is a chart pattern that occurs during a price decline followed by a stabilizing period which is then followed by a price rise of almost equal size. This creates a “U” shape which is the cup.
The price then moves slightly downward and sideways forming the handle – the handle may be a triangle in shape.
The handle should be smaller than the cup and not drop to the lower half of the cup but remain on the upper third. That’s why we talked of a slight downward movement in regard to the handle formation.
If the handle were to go deeper, then it would rule out all the gains the cup will have made and there would be no point trading this pattern.
This pattern may be a sign of trend reversal as well as a continuation pattern.
A trend reversal occurs when the downtrend is interrupted by a cup formation then the price starts rising to later form the handle.
A continuation pattern occurs during an uptrend where the rising price forms one side of the cup, then the handle, and continues rising.
Trading Using the Cup and Handle Pattern in Olymp Trade.
Follow these quick steps to trade using this pattern;
1. Identify the Cup and Handle Pattern.
Look for a price fall followed by a stabilization of price then an almost equal price rise forming the cup. Let the price move only slightly downward than sideways forming the handle. The handle should never go too deep but remain on the upper third of the cup. The Cup and Handle pattern has been formed.
2. Identify the Handle Breakout.
One thing leads to the other forming a Cup and Handle. Remember the handle forms on a sideways channel on the upper third of the cup and mostly takes the form of a triangle.
As a continuation pattern, we said that after cup and handle formation, the price is bound to continue rising. We then capitalize on this and observe to see that the price breaks the top side of the triangle forming the handle. If the breakout occurs, then the pattern is complete and the price is supposed to continue rising.
3. Enter a Buy Position.
Have you successfully observed and identified a breakout on the upper side of the channel forming the handle? Then the essence of doing so was to enter a buy position once a breakout occurred. The price is expected to continue rising if we capitalize on the Cup and Handle pattern being a continuation pattern.
4. Adjusting the Stop Loss.
The price was expected to rise after the breakout but that was not cast on stone. The price could just rise a small distance and fall, reverse after the breakout or even move sideways.
To exit the trade if it does not favor you, place your stop loss below the lowest point of the handle. This is protective and will help exit the trade in the event that what is expected fails.
The price may oscillate a number of times within the handle. Placing your stop loss below the most recent low is also another good option.
5. Adjusting the Take Profit.
Determine the size or height of the cup. Place your Take Profit at the same distance from the point of breakout upwards.
In the case where the cup sides are not equal, use the smaller height as the cup height for a conservative target. You can also use the larger height for an aggressive target.
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