A pattern that extends a bullish trend and helps identify opportunities for opening long positions is known as the Cup and Handle.
This figure determines an upward trend on the price movement chart. The pattern visually resembles a cup with a handle, hence its name.
How to Identify this Pattern
The figure below represents this pattern:
- Initial price movement up
- Cup
- Handle
- The upward movement continues
From the diagram, you can understand that for the pattern to form, there is a need for a swift price rise, followed by a minor correction, which forms a part of the pattern (the cup). This will create a rounded bottom that resembles a cup.
After that, the price will rise slightly more and correct more sharply to form the figure (the handle) on the chart. Then the price will rise again and exceed the maximum that was reached during the first movement.
A depth of 1/3-2/3 of the initial upward movement is the necessary cup depth. With such parameters, the figure becomes reliable.
The Ideal Cup
The figure below represents an ideal cup:
- Initial price movement up
- Cup
- Handle
- The upward movement continues
This drawing shows that the depth of the cup is less than two-thirds of the height of the initial upward movement. In this case, the cup is formed by a gradual (not sharp) decrease in price.
The Ideal Handle
The handle is also a crucial element of the pattern. It signals traders about the optimal point of position closure and completes the figure.
During a price correction, a handle appears, which should not be larger than the upward movement to the right of the cup. To determine the downward movement of the handle, traders often draw a trend line.
The figure below represents an ideal handle:
- Cup
- Upward movement
- Handle
How to Trade the Cup and Handle
Trades should be opened using this figure with the help of the handle, as shown in the figure below. After the price breaks the upper trendline of the handle and the candle closes above it, you can open a buying position.
The figure below represents a handle that has broken through the price. At such moments, it is necessary to open trades.
The black line shows the upper trend line of the handle, and the blue one shows the opening of a long trade.
A stop loss can be placed under the minimum of the handle. If the price falls below this line, the likelihood that the figure will be reliable will also decrease, and it will be necessary to exit the market.
Take profit can be determined in this way: determine the depth of the cup and postpone this depth up from the breakout point.
The figure below represents stop-loss and take-profit.
Blue 1 – long trade opening, red 2 – stop loss, green 3 – take profit, black 4 – distance to the breakout point from the bottom of the cup, black 5 – a distance equal to the previous one.