There are several price patterns when it appears that you need to enter orders immediately and the most typical of them is the Cup and Handle pattern. It is considered perfect because it has many No.1 categories compared to the patterns that I have introduced before such as the largest size, longest formation time, and highest profit. Let’s find out what the Cup and Handle pattern is and how to get the most profit with it.
What is the Cup and Handle pattern?
The Cup and Handle pattern was discovered by the legendary American investor – William J.O’Neil in 1988. The meaning of its name is simple because this pattern is shaped like a cup with a handle.
In the Forex market, price patterns are quite diverse. Therefore, naming the pattern with its shape is the best way to distinguish them. In theory, this pattern usually appears after an uptrend, which is a signal that the price will continue the preceding trend. However, in some cases, it is also formed at the end of a downtrend and is a sign of a reversal.
The Cup and Handle pattern consists of two parts, specifically as follows.
– The cup is formed after an uptrend with a minimum decline of 30% of that trend. This phase can be seen as the perfect start to the upside breakout right after the handle is fully confirmed.
– Initially, the market was in an uptrend and then began to decrease gradually forming the body of the cup on the left.
– Sometime later, the price moves to the bottom of the cup and begins to correct upwards to complete the right body of the cup.
– After the cup part is completed, the market will have a slight pullback with a common depth of ⅓ of the cup height. It should be noted that this depth should not be longer than ½ of the depth of the cup.
– After the accumulation period, the price corrects upwards to form a complete handle. Then if the price keeps rising to break out of the handle, this is when the cup and handle pattern is confirmed.
Crowd psychology when the pattern appears
Usually, when the U-shaped part of the cup appears, the price will drop slightly. Inexperienced investors will be very discouraged at this point. Meanwhile, in the left part of the cup, there will be a tendency to decrease the trading volume. When the price reaches a certain level, it will start the accumulation period.
This is reflected in the trading volume which will tend to increase. When the peak is reached, the price there now acts as a resistance level. Investors will start taking profits by selling.
The sale at this time will contribute to the handle formation. Investors continue to buy again, when the price breaks through the resistance level in a long term it will be considered the end.
What is a beautiful Cup and Handle pattern?
As I said above, this pattern takes a long time to form. Therefore, their frequency of occurrence on the chart is not as much as other types of patterns. The period for this pattern to be formed is also full of fluctuation with continuous bullish and bearish movements. Thus, not every trader can guess that it is a cup and handle pattern.
To be a beautiful cup, it is necessary to meet some criteria as follows.
– The cup part must resemble a bowl or the round bottom resembles the letter U. If the bottom is like the letter “V”, the signal will not be as accurate as of the cup with a U-shaped bottom.
– Cup depth: Ideally, it should be ⅓ of the depth of the previous uptrend.
– Handle: it will have to slope down to have the highest efficiency. This is also the part of the price that shows a final consolidation before reversing. So the price correction t is only 1/3 of the cup body. It shouldn’t be too deep. If it drops more than 50%, it will not be considered a beautiful cup and handle.
In addition, the edges of both sides of the cup must be horizontal, not tilted too much. Because they are seen as a strong resistance level. If the price breaks through the resistance, it will often go very far.
How to trade effectively with Cup and Handle price pattern
The trading strategy with this pattern is quite simple. Because you only need to determine the standard time to enter a bullish order, 80% of the problem has been solved.
Specifically, to place bullish orders, you can do it in two ways.
Place a bullish order as soon as the price breaks out of the handle.
Open a bullish order when the price returns to test the top of the cup when it changes from the resistance to the support.
Stop loss: Place at the bottom of the handle
Take profit: Set at an increment equal to the height of the cup (from the bottom of the cup to the top of the cup).
Above are the details of the cup and handle pattern. Hope this article can help you understand its meaning and how to use it in Forex. From there, you can make the right decision to make a profit when it appears.
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