Finding Exact Entry and Exit Points with the Cup and Handle Pattern

Cup and Handle pattern

The cup and handle pattern is a bullish continuation pattern that forms in upward trends. This pattern usually develops in high time frames, such as daily and weekly, and has high credibility. Learn this pattern well, and your bank account will be full of money.

This pattern has two main parts: a cup and a handle.

Cup

The price first hits a resistance zone in an upward trend; this zone brings down the price, and a pullback forms. At first, the price goes down with solid momentum, but then the intensity of the fall decreases, and the buyers do not allow it to go down further and enter the market again.

The price does not make new bottoms and goes up with low momentum. After a while, the momentum increases, an English letter U takes shape, the price rises, and the momentum increases. The price stops in the range of the previous top.

Here, a neckline forms, which we draw from top A to top B. In this case, the cup is complete. The cup size can last 3–6 months on the weekly and monthly time frames.

Handle

After completing the cup, the price enters a tight downward trend, forming a major bottom known as the handle.

The vertical size of the handle in the best conditions is 38.2% of the height of the cup. Its size can be up to 50% of the cup and still be valid. Sizes higher than 50% have very little value and credit; it is better not to open positions on them.

The handle is the last part of this pattern. Sometimes, the handle can form as a bullish flag or a bullish pennant in the lower time frames, which is a continuation pattern, and the price rises afterward. The handle slope is negative in most cases, but it can be a neutral trend or have a positive slope, which is less valid.

The cup and handle pattern can form in two-sided and one-sided markets because it plays a continuing role in upward trends, and the price rises after that. You can place a long position on this pattern. The cup and handle pattern is precious for stock market traders, and most of them use it to make a good profit.

Validity of the pattern

Cups with wider bottoms and a shape more like the letter U are more reliable than patterns whose bases are sharp, like a V. Cups with less depth are more valid and more potent, and cups that are too deep are less valid.

Two tops of A and B should be at the same level to increase the validity of the pattern. Of course, if B is a little higher, the resistance zone has broken, increasing the pattern’s validity. The line that connects A and B is called the neckline.

Trade on the Cup and Handle

After forming the cup and handle, you can enter a long position in the market if the price breaks the neckline. Breaking the neckline with a breakout candle is valid, and you can enter a long position above the neckline. It would be best to place the stop loss below the lowest price at the handle.

You can also set it below the breakout candle according to your capital management. The take profit in this pattern equals the distance from the lowest price in the cup to the neckline.

You can close your position in higher targets because it is a strong continuation pattern. You can use indicators or Fibonacci to determine the target. For example, you can use a moving average indicator. As long as the price is above the moving average line, the price is bullish, and you can keep your position open.

If the price comes below the moving average line, it means that the price has lost momentum and is likely to change direction, and you can close the position.  You can set the length in the moving average indicator to 21 in low and 100 in high time frames.

I will talk about the moving average indicator in the following articles. Please see my long position on the XAUUSD chart in the 5-minute time frame.

I like this trade very much. If you want the truth, I am very interested in the Cup and Handle pattern because it is a strong pattern, and my win rate for this pattern is almost 85%. When the price broke the neckline, and the breakout candle closed above it, I entered the long position at 1719.500 USD and placed the stop loss below the breakout candle at 1718.000 USD.

For the take profit, I used the distance from the lowest price of the cup to the neckline and placed it at 1723.500 USD. This trade has a 1:2 risk-to-reward ratio. In this position, I made a profit of $6500 and invested it in the cryptocurrency market on Bitcoin. With this training, you will also be able to make a profit in the same way.

Inverted Cup and Handle pattern

Inverted Cup and Handle is a continuing bearish pattern that forms at downward trends, and the price continues its trend after that. This pattern is precisely the inverse of the cup and handle, like putting a cup upside down on the table.

The inverted cup and handle pattern only forms occasionally in the chart. But if you see it, you should be delighted because you can make a good profit. We need an inverted cup and an inverted handle to form this pattern.

Inverted Cup

The price pulls back in a downtrend and goes up a bit. After the pressure from sellers, the momentum will decrease, and the price will not be able to make higher tops. The price enters a downward trend with low momentum, and then the momentum increases.

In this case, an inverted cup forms, and the price stops at the previous bottom. Here, the neckline forms, and we draw it from the bottom of A to the bottom of B.

Inverted Handle

After the formation of the cup, the price enters upward and makes a major top known as the handle. The vertical size of the inverted handle in the best conditions is 38.2% of the height of the inverted cup.

The inverted handle size can be up to 50% of the cup. Sizes higher than 50% have very little value and credit; it is better not to open positions on them.

Sometimes, in the lower time frame, the inverted handle is in the form of a bearish flag or a bearish pennant, a continuing downward pattern. In these cases, the validity of the whole pattern is much higher.

Inverted cup and handle have many fans in two-sided markets like Forex and Cryptocurrency. In one-sided markets like stocks, you cannot open a short position. So it is only used as a signal to continue the downward trend.

Validity of the pattern

Inverted cups with an expansive top shape, like an inverted letter U, are more reliable than patterns whose top shape is sharp, like an inverted V. Inverted cups with less height are more valid and stronger, and the cups that are too high have less credibility.

The two bottoms of A and B should be at the same level to increase the validity of the pattern. If B is a little bit lower, it shows the support zone’s break and increases the pattern’s validity even more. The line that connects A and B is the neckline and is very important.

Trade on Inverted Cup and Handle

If the price moves downward after forming an inverted cup and handle pattern and breaks the neckline, you can open a short position. A long breakout candle is preferable for the price to break the neckline.

After closing the breakout candle below the neckline, you will be more confident that this breakout is true, and the price will enter a strong downward trend.

You can enter the short position below this candle and place the stop loss above the highest price of the handle. Indeed, you can take help from the candlestick patterns and place the stop loss above the breakout candle.

The take profit in this pattern equals the distance from the neckline to the highest price in the cup. You can choose other methods that suit your personality and capital management.

For example, you can keep the position open as long as the price is below the moving average indicator line to get a very good profit. When the price rises above the moving average, you can close your short position.

Don’t forget; you can use a moving-average period length of 21 for lower and 100 for higher time frames. Please see my short position on GBPUSD in the 2hour time frame.

When the price broke the neckline, I waited for the breakout candle to close below the neckline. After that, I entered the short position at 1.37350 USD and placed the stop loss above the breakout candle at 1.38100 USD to get more profit.

For the take profit, I used the distance from the highest price of the cup to the neckline and set it at 1.36700 USD. I made a profit of $8000 with this trade. After that, I had a very pleasant cup of coffee.

Research on Cup and Handle pattern

Renowned scientists have researched the cup and handle pattern. They have achieved exciting statistics that can be very useful. It would help if you used this research in your daily analysis to increase your profit.

William O’Neil, one of the leading technical analysis researchers, says that the cup and handle in upward trends usually form after a 30% increase in price, and it usually takes 65 weeks to complete the pattern. Kirkpatrick and Dahlquist say that the market volume usually decreases in the left part, which is the bearish part of the cup, and increases in the right part, when the price rises again.

Bulkowski, one of the most reliable researchers in this field, has reached interesting results about the target of the cup and handle. He says that to get the best result, we should consider the cup and handle target to be 50% of the distance between the lowest price of the cup and the neckline.

Bulkowski also researched the inverted cup and handle and said that the target of this pattern is, at best, 47% of the distance from the neckline to the highest price of the cup.

Conclusion

In this article, you have learned one of the sweetest classic patterns. Whether a bartender in a cafe in Milan or a professional trader, you can profit by using cups. I follow all the principles discussed in my own positions to make a profit. Be careful that you also use these points because if you enter a position without paying attention to these rules, you may lose some of your capital.

It is essential that you practice and spend a lot of time analyzing the charts. Be sure that after some time you will get a good view of the market movements and you will be able to make good profits. All these analyses are like a bird’s wing. The other wing is capital management and trading psychology.

If you don’t follow both of these things, you will fall. But if you practice all of them, you will fly to the highest peaks. Thank you for accepting my invitation to drink this coffee in this beautiful cup.