Cup and Handle Pattern: Everything you Need to Know
If you check the price action movement of any trading market, you will see the changes in the instrument price are indicated in various forms, from candlesticks to graphs. This is what we call a pattern or friend that implies whether the price is going uptrend or downtrend, prospective time for a price action reversal, maximum up and minimum down times for trades, and so on. If you extend the price action movement for a particular trading day, you will find several patterns in the movement graphs.
Published on 28 February 2023
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One such pattern is known as the cup and handle pattern. Once you gather enough ideas about this particular aspect, studying the price action movement and deciding on any future trend or changes in the pattern will become easier. Keeping this in mind, we have illustrated a fundamental guide for understanding what this particular pattern means and what you should do if you come across the cup and handle pattern in the price action movement chart.
What is the cup and handle pattern?
The cup and handle pattern is one of the most important technical indicators for analyzing the price action movements of various markets. Here, the graph will resemble a cup, with either end being raised higher than the bottom, and will soon follow a steep uptrend that symbolizes the handle.
How to analyze a cup and handle pattern?
You should learn the proper way of analyzing the cup and handle pattern before reaching any conclusion or opening or closing a trade. So, in this below section, we have discussed some of the major parts of the pattern that you should be aware of.
The first portion of the trade will have a downward slope, symbolizing a downtrend or decrease in the price. At the bottom, it smoothly transfers into an uptrend without any peak. It means that the price starts to increase gradually with the nominal value.
Once the transition is made, the price again starts to rise with more difference, which is why you will find an uptrend on the other side of the cup.
Once the market encounters a bearish reversal, there will be small price changes, and stability will be introduced for a couple of minutes only.
Again, there will be a reversal from where the bullish trade will convert into a bearish trend and form a sharp price decline downtrend. It will be quite short; after this, there will be a sharp reversal with an uptrend. This particular section acts as the handle in cup pattern in trading.
What can you learn from a cup and handle pattern?
Before you reach any conclusion, there are certain things you should consider about the cup handle pattern. Until and unless you do so, it will become difficult for you to invest appropriately and gain profits from the trade.
A coupon handle pattern is significantly a bearish trend as it symbolizes a decline in the asset price of the concerned market.
It is also a continuation pattern, meaning there should be a trend before the beginning of the cup structure. You would never find a cup and handle pattern right from the beginning of the trading day.
If the curve of the cup is steeper, the risks will be quite high. This is why most traders prefer a cup and handle pattern with a round and smooth base.
The price trends in the handle part are usually formed later, after approximately 2 weeks.
Ideally, the depth of the cup in the pattern should be approximately 33% based on the previous search with an uptrend. But in extreme cases, the price decline can be up to 68%, symbolizing a market crash.
Usually, the highs on either side of the cup should be on the same level, or in other words, the acid price should be equal at the bullish and the bearish reversal points of the cup.
How is the cup handle pattern beneficial for traders?
Ideally, the cup and handle pattern indicates that a price action movement against speculation will soon happen, but it can smoothly transition from a downtrend to an uptrend. In other words, it prevents traders from making rash decisions like selling all the assets because that downtrend is steeper and has a considerable depth of more than 20%.
Conclusion
As you are now aware of what a cup and handle pattern is in the trading market, utilizing it and deciding whether to open or close the position won't become a hurdle. However, it would help if you considered that it's a continuous pattern and should have had an uptrend prior to the beginning of this specific pattern. If not, you might invest the wrong way and suffer losses.
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