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.