There are many chart patterns that prove helpful for trading in the forex exchange market. Chart patterns are the indicators that occur with a specific and repetitive movement of prices. It resembles the past patterns and is a way to enter or exit a trade.

A cup and handle forex pattern is a bullish continuation pattern that resembles a cup with a handle, where the cup pattern is in the shape of a “U” and the handle pattern has a slight downward drift.”U” shape looks like a cup and handle looks like a triangle. Just like any other pattern, a cup and handle forex market pattern proves beneficial for trading as it gives a specific entry point, a stop loss, and a target price to exit and make a profit.

This article is dedicated to this specific pattern on how you can trade using it, what you should be cautious of and how you can earn a profit through this.

The Cup and Handle Forex Pattern

The cup and handle forex pattern happen when a price wave goes down, and a stabilizing period follows it, after which the price rally with an equal size of downside wave. Thus, in shape, it looks like “U” or a cup. This pattern can be seen in smaller time frames like 1 minute, 3 minute kind of charts as well as in daily, weekly, and even monthly charts. After the price rally, it goes sideways or goes down a little and forms the “handle” which may also look like a triangle.

The handle here needs to be smaller than the cup. Also, the handle should stay in the upper third part of the cup and should not fall in the lower half. For example, if the cup is being formed between $9 and $10, the handle should be between $9.65 and $10. It would be a red flag of avoiding a trade if the handle is in the lower half and vanishes the gains of the cup.

The cup and handle forex pattern can signal a continuation or a reversal pattern. The continuous pattern is the one in which the currency prices are soaring up, and the chart forms a cup and handle pattern, after which the price shoots up further. In a reversal pattern, prices are falling, then the chart shows a cup and handle pattern, after which the trend changes and the prices increase.

When to Enter a Cup and Handle Pattern

The best practice would be to wait for the handle to take form. The handle usually goes sideways or goes down or foams a triangle. When the currency prices move outside the handle, it can be said that the pattern is complete, and the prices are expected to hike.

Though this is just a partial story, the main essence lies in setting up a stop loss as the hiking price can move a little upwards and afterward can go sideways or even fall. It creates a downside risk of loss.

A Stop Loss is Must

A stop-loss is the only way to save forex traders from the downside risk of the cup handle forex pattern. It helps in managing the risk if the price falls down.

The ideal practice of stop loss in the cup and handle forex pattern would be to place the stop loss at the lowest point of the handle. If the price is frequently changing its directions, then placing a stop loss at the most recent low would be preferable to avoid your trade getting sold prematurely.

As the handle occurs at a third of the cup, the stop loss should be in the lower half of the cup. For example, if the cup formation can be seen at $40 and $39.50, the stop loss should be at $39.75, considering that it is the halfway mark for the cup. Having the handle formation and stop loss in the upper half of the cup provides a stop loss closer to the entry point and ameliorates the risk to reward ratio. In such a scenario, the stop loss is the risk portion, and the exit price is the reward that a trader would gain.

Opting for the Cup and Handle Chart Pattern Target

The height of the cup doesn’t matter, all you have to do is add the height of the cup to the breakout point of the handle. That would be your ideal cup and handle chart pattern target. For example, if the cup pattern is visible between $10 and $9, and the breakout point of the handle is $10, your ideal target should be $11.

In many cases, the left side of the cup has a different height than the right side; in such scenarios, you can use the smaller height. You can add it to the breakout point of the handle, and that would become your target. You can also use the right side of the larger height side if you want your target to be aggressive.

You can also use a Fibonacci Extension as an indicator here. You can draw an extension tool from the low of the cup to the high on the right side of the cup, and can connect it with the low of the handle. The one level or 100% here would show you a conservative target price. The 1.618 or the 162% would give an aggressive target price. You can place your target between 100% to 162%.

In the cup and handle forex pattern, if you do not reach your target price by the end or closing time of the market, you are better off selling the position before the market closes. You can opt for a trailing stop loss in case your target price gets closer but before it reaches there, a drop occurs frequently. It would help you get a price near your target price.

“V” Shape Cup and Handle Forex Pattern

An aggressive cup handle forex pattern means the cup is in the form of “V” shape instead of “U.” In “V” shape formation, the price falls and hikes very sharply. Most traders try to avoid this pattern, but some find it attractive to trade-in. The “V” shape cup formation also means the aggrieve stance of traders on the reversal pattern.

It can be said that the traders traded fiercely, which made the price shoot up, forming a sharp “V” shape. However, as there was no stabilization period in this pattern, the price can slump as easily as it hiked. Overall if the price goes beyond the handle formation, it does show an upside trend.

What All Should You Consider?

The cup and handle pattern has a pause or a stabilizing period in which the price goes sideways or forms a round bottom. That can mean that the price is at the support level, and it would not fall beyond that. It eventually means after a certain point, the odds of the price to increase are higher.

If the trend is upward, and the cup handle forex pattern forms in the middle phase of the trend, it can benefit more. However, you have to be careful in noticing the long term support level and the moving average line. The cup and handle formation in downturn suggest a reversal trend and showcases that the price is likely to go up.

A forex trader has to be aced in identifying and implementing this pattern, as wrong entry or exit point will trail off the benefits of using this forex pattern. With practice and meticulous trading capabilities, you can master this technique in less time. 

What is a megaphone pattern?

Megaphone pattern (well-known term) or Broadening formation (the term from books) is reverse symmetrical triangle trading pattern that is formed on increasing price volatility and diagrammed as two diverging trend lines, one rising and one falling.

How to trade Megaphone chart pattern ?

Another chart pattern employ in technical analysis is the megaphone pattern. The wide formation is a good hint into the risen risk that accompanies change.
The stock market comprises of two giants, that is, buyers and sellers. The contest between the duo forms patterns in the market. To know and identify what patterns stand for is very important.

Megaphone patterns

The way megaphone patterns form earns it a name, ‘broadening formation.’ Stock does migrate without a definite direction due to high volatility. Thus formed megaphone patterns. Higher gets high and lower gets low simultaneously as a result.
Nevertheless, using a megaphone pattern one can get both lower lows and the higher highs. As a result, there is no direction. An important aspect of this pattern is trend lines.

Example : Bullish megaphone chart pattern on Weekly timeframe:
What does a long term megaphone pattern mean? In this case we can see several weeks bullish trend after megaphone pattern is formed.

Due to this one must be good at joining the dots, else it assumes the shape of a triangle pattern. This will end up change the way one trade.
Example : Berish megaphone chart pattern :

The process of forming broadening formation is by using the trend line to link the higher highs and lower lows. The shape of megaphone patterns is just like a reverse triangle.

BREAKING DOWN THE BROADENING FORMATION PATTERN

When the market starts having a higher risk for a long period of time then megaphone patterns start forming. One of the key factors contributing to megaphone formation is the election. The reason being that electing a particular leader can change the affair of things in a country. Which later have an effect on the market. Since the political clime is not stable then the market keeps on fluctuating.
Megaphone pattern also forms as a result of the earnings season. Earning reports from companies have an effect on the stock. Earnings may have both good and bad sides. And this cause different reactions. One such reaction results in broadening formation.

Megaphone patterns are usually seeing as the bearish pattern. This is because it is a reverse symmetrical triangle. Whereas normal symmetrical triangles are neutral.
Is the coil pattern the same as the megaphone stock chart pattern? No! It is because the Coil pattern is the symmetrical triangle and the megaphone pattern is the reverse symmetrical triangle.
Swing as well as day trading both capitalize on volatility. Single direction has always been a suitable path that long term investors want to trade.
To successfully trade various patterns, our course on day trading will be helpful. In the volatile pattern, it is better to trade around the trend lines. All base on one style, while hitting angular support it’s very much best to go long. Also, while hitting angular resistance, go short.

Broadening formation or megaphone formation

A food megaphone pattern formed on the one-minute chart by PTI. Either swing or day trader, the best time to buy is when the trend lines are hit. Angular support while long and the angular resistance while short.

The significant part of technical analysis is trend lines. This results in swing and day traders off profit from the change of a broadening formation.
Up to 2 weeks, Swing trading holds overnight. It’s all has to do with one risk management. Technical pointers are in place to assist one get in and out of trades as soon as possible. The trend lines can be used as entry and exit points also as stop losses. The broadening of megaphone patterns indicates the potential to profit is higher. This can also be indicative of the potential for loss is higher.
Thus, there’s a need to trade with effective risk management. Use the technical pointers to self-advantage. The small candlestick 2 to 3 patterns are also useful. The combination of these can provide great entries as well as exits.

Megaphone chart pattern case study

Methodology: In our research, we tried the Pointzero Megaphone indicator (very good megaphone chart indicator) and test last 10 years for EURUSD, GBPUSD, USDCAD, AUDUSD, NZDUSD on H1, H4 and Daily chart.

We created test using Visual Testing tool in Metatrader :

Results :

Discussion :
The results were very bad. We tried to see at least 1:0.8 risk-reward ration. For 1 risk and 1 reward test results will be worse than in our research.
Our tests are made by visual and manual observations so we accept any critique.

How to trade megaphone patterns

Megaphone patterns are often most suitable for day and swing traders. It can also be used by long term investors to use as a sign to support their investments. Just like with any style of trading, it’s better to study and learn the different patterns and what they stand for.

Very often I got the question: “How do you trade megaphones pattern intraday”. To be honest, I avoid trading this pattern on lower time frames and intraday and I try to use it only on H4, Daily and Weekly chart time frames.
The practice trading account begins with opening a paper trading account. As a result, you’ll get good at drawing trend lines and linking the dots to arrive at different patterns; which is a crucial part of trading. In personal opinion, success rate, based on our tests, is bad and we avoid to use this pattern in the trading decisions for smaller time frames. Of course, the weekly and monthly charts can be interesting for this pattern.