The cup and handle pattern is a bullish continuation pattern and can be used to confirm Buy entry signals.
It forms during uptrend as a continuation. It shows a pause in trend price and later a continuation. Price in uptrend drops for a while then rises again hitting the same level forming the cup. It then falls a bit forming a downward handle and again raises beyond the previous peak making a whole structure a shape of a Tea-cup.
A cup with a longer length and width gives a stronger signal. The handle is the most important part in this pattern since it gives the trigger for the buy signal.
The cup may form with a round bottom which indicates that price stabilized before rising as it found support due to equal buying and selling pressure until the buyers took over which led to rise of prices. Or it may appear in a V-shaped bottom indicating how buyers came in with a lot of pressure causing a sharp rise in prices on the right side of the cup.
The right high of the cup may be at the same level with the left or different with a small difference in height. The handle may appear inform of the channel or a triangle and should not fall into the lower half of the cup.
Trend lines are drawn on to clearly mark the handle. A break and close of candle above the upper trend line confirms the Buy signal.
Stop loss is placed slightly below the lower low/lowest point of the handle and the profit target got by measuring the vertical height of the cup and projecting that same distance upwards from the handle break out.
Let’s take a look at AUDCAD, Daily chart below;
From the chart above, you can clearly see we had price in uptrend followed by the Cup and handle pattern. A break and close of candle above the handle confirmed the Buy signal as shown on the chart above.
Stop loss is placed slightly below lowest point of the handle and the profit target got by measuring the vertical height of the cup (H) and projecting that same distance (H) upwards from the handle break out.
NOTE: A cup and handle pattern is also occur at the end of a downtrend therefore can still act as a reversal pattern signal when in a down trend. The criteria for entry, stop-loss and profit target are exactly the same as when it is a continuation pattern .
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