How to Identify Cup and Handle Pattern in Forex Trading
The Cup and Handle Pattern provides traders with ideal entry or buy signals in a market during an uptrend. In this article, we discuss everything about the Cup and Handle Pattern and the related strategies that one can apply while trading.
What is the Cup and Handle Pattern?
The Cup and Handle Pattern is a technical price chart that forms the shape of a Cup and a Handle, which indicates a bullish reversal signal. It helps traders find long opportunities in the market as it is formed during a continued uptrend. This pattern appears when selling pressures exceed the buying pressures, which results in a temporary and weak downtrend followed by a stronger uptrend.
- The shape of the Cup in this pattern resembles a 'U', and the longer the 'U', the stronger is the trend signal
- The Handle takes the shape of a declining linear trend
- Traders receive a buy signal at the bottom or end of the Handle as the prices incline thereafter
- Traders receive a stop-loss order placement signal at the end of the Handle's low point breakout level
Example of using the Cup and Handle Pattern
When forex trading, let’s assume,you decide to enter a USD/EUR trade at the exchange rate of 2, during an uptrend. The exchange rate reaches a high of 4.5, where you decide to exit the trade and lock in the profits. Now, the USD/EUR price starts falling from 4.5 to 3, and then 2.5. Thereafter, the currency pair trades around the same 2.5 level for some time before witnessing an uptrend once again. The uptrend raises the USD/EUR prices to 4.4, which is very close to the previous high price of 4.5. At this point, a U shaped Cup forms, signaling a possibility of the Cup and Handle Pattern formation. A temporary downtrend then replaces the uptrend as USD/EUR prices start falling again and reach a level of 2.7, another low. This forms the Handle of the Cup and Handle Pattern, confirming the bullish reversal pattern. At this point, traders receive a buy signal to place long orders at the exchange rate of 2.7, as the USD/EUR prices start inclining for one last time, forming a continuous uptrend and reaching an exchange level above the previous high of 4.5. You can stay in the trade for as long as the market trades in your favored direction. The stop-loss order can be placed around 2.7 to ensure that your risk and losses are protected if the markets turn against you.
Identifying the Cup and Handle Pattern
- Start by looking for a prior continued uptrend in the market.
- Once the uptrend is identified, the prices start to dip gradually. That’s when you should trade in a decided range for sometime before the prices start rising again, forming the first half of the pattern – the 'Cup'.
- Look for a symmetrical look at the high price points on both sides of the Cup, which are almost the same.
- The Cup pattern is followed by a sharp decline in the prices that form the second half of the pattern – the 'Handle'.
- Once the Handle is formed, the temporary downtrend ends and is followed by a bullish reversal signal where the prices start increasing again, providing entry signals to traders.
Inverted Cup and Handle
The Inverted Cup and Handle pattern is the exact opposite of the Cup and Handle Pattern as it indicates a bearish reversal pattern. It provides traders with ideal sell/exit signals and also enables them to short trades during the downtrend. Being the opposite of a regular Cup and Handle Pattern, it first makes an 'n' shape (Cup), followed by an upward linear shape (Handle). In this pattern, asset prices first witness a steep fall during a continued downtrend, followed by a sudden but not so steep increase in the prices. The prices continue trading around the same range before finally falling again, making the first half often pattern – the inverted Cup. After that, the prices temporarily start increasing again, making the second half of the pattern – the Handle. The temporary incline in prices is followed by a continued downtrend thereafter, reversing the market into a bearish trend.
- Traders receive signals to short, exit or sell the trade in this pattern at the topmost point of the Handle
- The stop-loss orders can be placed at the bottom of the commencement of the Handle
Three other types of Cup and Handle Pattern
1. Cup and Odd Handle
The Cup and Odd Handle Pattern include a less rounded bottom that makes the Cup look like a 'V' shape and an odd-looking non-linear line signifying the Handle. The Handle is not more than one-fourth of the Cup's total length and does not look like the regular Handle. However, the Handle still serves the same purpose as it indicates a temporary decrease in the prices. It provides the trader with an ideal buy signal to long the trades. The pattern occurs in a continued downtrend, witnessing a steep fall in the prices, reaching a new low and following a sharp increase thereafter. This incline is followed by another temporary (and short) fall in the prices, followed by a continued uptrend.
2. Multi-year Cup Handle
As the name suggests, the Multi-year Cup Handle is formed over a few years in the financial market. The initial steep drop in the prices followed by an incline forms the Cup in the pattern, which is more like a 'V' shape and less like a 'U' shape followed by constant fall in prices that make the Handle. It comes with a regular pullback expectation, but the prices witness a temporary decline over a few months to a year before they rise back again. The final increase in prices provides traders with entry signals in the market. The Multi-year Cup Handle best suits traders who want to trade in the long-term and look for historical price patterns to make trade decisions accordingly. It provides traders with the continuous trend existing over the years and signals them the ideal long opportunities.
3. Intraday Cup and Handle
The Intraday Cup and Handle pattern is a short term pattern that can be located on a 60-minutes chart and help traders long for a trade opportunity in a continuous trend. It looks almost the same as a regular Cup and Handle with only one difference - since it appears on an hourly chart, the price fluctuations are higher but close to each other. So there are more price moves in the charts, making the pattern appear narrower. It is identified in an uptrend when prices start dropping temporarily, trade within a range for some time before rising back up, forming a flat 'U' shaped Cup. The formation is followed by some decrease in the prices, forming the Handle, followed by the final uptrend.
Cup and Handle Pattern trading strategies
1. Selling the supply line strategy
The selling the supply line strategy follows trendlines to place profit targets and provides traders with ideal profit levels during a long or short trade. With this strategy, traders receive closer to accurate signals about where the market can potentially reach, set their profit targets accordingly and make trade decisions wisely. Both the high price points on either side of the Cup in the Cup and Handle Pattern are joined with a horizontal line and expect to have a target at a level double of the line's positioning. This means if the line that joins the high price points of the Cup is at an exchange rate of 5, profit targets are set at an exchange rate level of 10.
2. Strong Handle strategy
As already discussed, the shape of the Handle in the Cup and Handle strategy differ according to the time frame and overall market sentiment. In a medium or long-term trend, the Handles are generally not very clearly visible due to the large spread in prices, whereas, in a short-trend, Handles are clearly depicted through a temporary downtrend as they trade in a tight price range. As Handles in this pattern provide traders with ideal stop-loss and buy levels, they are vital as it helps traders minimize their loss possibilities. Trading the strongest Handle provides traders with stop-loss and entry levels that enable traders to make successful trading decisions. Here is how you can trade with the strong Handle strategy as an intraday trader –
- On a 5-minute chart, identify the Handle that is made up of at least four and at most ten candlesticks.
- Make sure that all the candlesticks have a short body and trade in a tight range.
- The downtrend that follows produces a price expansion, providing traders with an opportunity to long the trade.
- The last candlestick in the Handle closes above the resistance level in the market, at which the rising prices stop rising and start falling (temporarily).
- Traders receive the exact buy signal at the level where this Handle ends and prepares to follow a bullish reversal and continued uptrend.
3. Cross of cloud buying strategy
The cross of cloud Cup and Handle buying strategy indicates the breakout level at which traders can long the trades. It provides traders with the ideal entry points in the market that help them place successful buy orders. It consists of a cloud range that tells trades where the asset prices are potentially going to head in the future during the uptrend. When the Cup and Handle pattern's Handle breaks above this cloud, it confirms the strong uptrend and provides traders with an entry signal. However, if the last candlestick in the Handle does not break above the cloud, the traders receive a signal that the pattern might send a false long signal, and they should wait for the uptrend confirmation.
4. The pre-breakout strategy
In most cases, traders trade the breakout in the Cup and Candle strategy as soon as the asset prices break above the Handle formation. With the pre-breakout strategy, traders can actually long a trade well before price actually breaks higher, with a goal of profit maximization. Here is how you can trade with the pre-breakout strategy –
- Identify a Handle formation when the market is not very volatile in a medium or long-term time frame to make use of the Cup and Handle Pattern.
- Now, move to a lower time frame chart to identify a false breakout level near the support level of the pattern, the point where falling prices stop falling and start increasing.
- If you notice a false breakout occurring at or near the support level, place the long or buy order there and then to trade the breakout before it actually occurs in the medium- or long-term time frame.
- You can place the stop-loss order at the low-price level to minimize risk.
How to use Cup and Handle for forex trading
- Open a trading account
- Decide on a currency pair that you want to trade and look for the short-, medium- or long-term price charts as per your trading goals and requirements.
- Once you have gone through a currency pair's price chart, identify the Cup and Handle pattern.
- Open a long trade once the Cup and Handle Pattern confirms the bullish trend. The long order can be placed at the level where the Handle ends. However, if you identify an inverted Cup and Handle pattern, confirm the bearish trend reversal and open a short trade at the end of the Handle.
- Place a stop-loss order below the lowest point of the Handle in the pattern. If trading with the Inverted Cup and Handle, you can place your stop-loss order at a level above the Handle's end.
- At last, you can set your take profit order either at a distance that is equal to the Handle's size from the breakout level or at a distance equal to the Cup's size, which is also calculated from the breakout level.
- Stay in the trade till the market trends in your favored direction, which means an uptrend when trading the Cup and Handle strategy and a downtrend when trading the Inverted Cup and Handle strategy.
- Monitor the trade and exit when the profit targets are achieved.
Trade with the Cup and Handle Pattern to identify bullish reversals
Identify ideal entry points with the help of the Cup and Handle Pattern in the forex market. Start your trading journey Blueberry Markets to enjoy an end-to-end trading experience with expert brokers and advanced tools and techniques. Sign up for a live trading account or try a risk-free demo account on Blueberry Markets.
What Are Bear and Bull Power Indicators?
Bear and bull power indicators in forex measure the power of bears (sellers) and bulls (buyers) to identify ideal entry points.
How to Trade With The On Balance Volume Indicator
The On Balance Volume (OBV) indicator analyses the forex price momentum to measure the market’s buying and selling pressure.
How to Use The Alligator Indicator in Forex Trading
The Alligator indicator can identify market trends and determine ideal entry and exit points based on the trend’s strength.
How to Use Inside Bar Trading Strategy
Inside bar trading offers ideal stop-loss positions and helps identify strong breakout levels.
What is the Martingale Trading Strategy in Forex?
The Martingale trading strategy increases the possibility of winning a trade in the forex market.
How to Use The Forex Arbitrage Trading Strategy
Forex arbitrage trading strategy allows you to profit from the difference in currency pair prices offered by different forex brokers.
The Beginner’s Guide to MQL5
MetaTrader, as a platform, has built-in functions that assist in technical analysis and trade management while also allowing traders to develop their own indicators and trading strategies.
How to Use DeMarker Indicator For Forex Trading
Every trader needs to know precisely when to enter or exit a forex market.
How to Use The Accelerator Oscillator For Forex Trading
The Accelerator Oscillator indicator helps detect different trading values that protect traders from entering bad trades.
A Forex Trader’s Guide to Awesome Oscillator
When you understand market momentum, you can better identify market reversals.
What is Money Flow Index?
The Money Flow Index can analyse the volume and price of currency pairs in the market.
What is The Ichimoku Kinko Hyo Indicator?
The Ichimoku Kinko Hyo indicator provides traders with the market’s current momentum, direction and trend strength.
Top Pullback Trading Strategies
Pullback trading strategies provide traders with ideal entry points to trade along with the existing trend.
What is High Wave Candlestick?
The High Wave Candlestick pattern occurs in a highly fluctuating market and provides traders with entry and exit levels in the current trend.
What is the Parabolic SAR indicator?
Identifying market trends becomes easier with the Parabolic SAR indicator as it provides the ideal entry and exit signals in strong trending markets.
What is Currency Correlation?
Currency correlations help trade multiple currencies in the forex market by identifying the market trends of each currency pair.
Price Action Trading Strategy
A Price Action Trading Strategy helps find ideal entry and exit points depending on expert opinions, news announcements, or technical indicators.
Average True Range
Average True Range (ATR) helps in identifying how much a currency pair price has fluctuated. This, in turn, helps traders confirm price levels at which they can enter or exit the market and place stop-loss orders according to the market volatility.
Moving Average Crossover
The Moving Average Crossover is a valuable tool to find the middle price-point of a trend in forex trading. When currency prices crossover their current moving averages, it helps traders identify the favorable buying or selling points for the currency.
What is the Bullish Engulfing Candlestick?
Bullish Engulfing Candlesticks helps in identifying an uptrend reversal in the market. This candlestick pattern stands out because a trader does not need to wait until the entire pattern is completed to enter a trade.
How To Trade The Gartley Pattern
The Gartley pattern helps identify price breakouts and signals where the currency pairs are headed. The pattern is also widely used in the forex market to determine strong support and resistance levels.
How to Trade Forex With NFP V-Shaped Reversal
A Non Farm Payroll (NFP) V-shaped reversal refers to a sudden increase or decrease in the currency pair prices right after an NFP report is released.
Candlestick Patterns: Top Candlestick Charts Every Trader Should Know
Candlestick patterns depict the price movement of assets in a graphical manner. Candlestick patterns also enable traders to predict market behaviour.
What is the Evening Star Candlestick Pattern?
Evening Star Candlestick Patterns help traders identify ideal exit levels in the forex market by signalling a slowed upward momentum and strengthened downward momentum.
How to Use Ichimoku Cloud in Forex?
The Ichimoku Cloud provides a clear market trend direction to the traders and helps them make market decisions accordingly.
Pennants Pattern: How to trade bearish and bullish pennants
Pennant Patterns work as a continuation signal in the forex market and help identify the ideal entry and exit price points
How to Trade Forex With Renko Charts
Renko Chart is a technical indicator that provides strong market trend directions by filtering out minor price movements
What are Ascending and Descending Triangle Patterns?
The Ascending and Descending Triangle Patterns confirm continued trends in the forex market.
What is the Head and Shoulders pattern?
The Head and Shoulders pattern is a trend reversal indicator that predicts bullish to bearish and bearish to bullish reversals in the forex market.
What is the Hammer Candlestick Pattern?
Hammer Candlesticks enable traders to identify potential market reversal points, determine the ideal time to enter the market and place buy or sell orders accordingly.
What is The Opening Range Breakout Strategy
The Opening Range Breakout (ORB) Strategy involves taking forex positions when the currency pair prices break below or above the previous day's high or low
Morning Star Indicator
The Morning Star Indicator helps identify strong trend reversals in the forex market and enables you to take trade position entry decisions accordingly.
How Does Stochastic Indicator Work in Forex Trading?
Stochastic Indicator helps traders identify overbought and oversold market conditions that substantially lead to market reversals.
Favourite Fib Fibonacci Retracement
Fibonacci retracement strategies help traders identify the market's support and resistance levels, trend reversal points, and entry and exit decisions.
Heikin Ashi Candlestick Pattern
The Heikin Ashi Candlestick pattern is almost the same as the traditional candlesticks, with one big difference—the former is an averaged out version of the latter.
Multiple Time Frame Analysis in Forex
By monitoring different currency pairs in different time frames, you can make your Forex trades more successful and profitable.
What are Bollinger Bands?
The Bollinger bands can help identify overbought and oversold market conditions, protecting you against placing any orders that could lead to losses.
Andrew's Pitchfork Trading Strategy
Andrew's Pitchfork is a Forex trading strategy that can predict protracted market swings and help you in identifying potential market trends that can indicate potential exit and entry points.
Fibonacci retracements are one of the most popular methods for predicting currency prices in the Forex market. Predicting upward or downward market movement can help traders with accurate price analysis for exiting or entering the market.
Trading in Volatile Markets
Forex volatility is the measure of how frequently a currency's value changes. A currency either has high volatility or low volatility depending on how much its value deviates from its average value.
The ABCD pattern
One of the most classic chart patterns, the Forex ABCD pattern represents the perfect harmony between price and time.
The Bearish Gartley Pattern
The Bearish Gartley pattern was introduced in 1935, by H.M. Gartley in his book, “Profits in the Stock Market”. The pattern helps Forex traders in identifying higher probabilities of selling opportunities.
The Bullish 3 Drive pattern
The Bullish Three Drive pattern in Forex trading is a rare pattern that gives traders information about the Forex market's potential at its most Bearish point, and in turn, suggests probabilities for a market reversal.
What is the MACD Indicator?
The Moving Average Convergence Divergence (MACD) indicator helps traders quickly identify short-term trend directions and reversals in the forex markets. You can use the MACD indicator to determine a currency pair price trend's severity and measure its price's momentum and even identify the bearish and bullish movements in the currency pair prices.
Guide to Forex
Enter your details to get a copy of our
Start a risk free
News & Analysis
Catch up on what you might
have missed in the market.