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SMART Price Action Cup and Handle Strategy (Best Chart Pattern For Forex & Stock Trading) - YouTube
Channel: The Secret Mindset
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Cup and handle pattern is one of the most
reliable patterns that generates strong and
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high-probability trade setups.
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This patterns looks exactly as it’s named.
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It looks like a cup and its handle when you
look at it from the side.
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The cup and handle pattern occurs in both
small time frames, like the one-minute chart,
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and in large time frames, like daily, weekly,
and monthly charts.
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It occurs when there is a price wave down,
followed by a stabilizing period, and followed
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by a rally of approximately equal size to
the prior decline.
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It creates a u-shape, or the "cup" in our
"cup and handle."
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the price then moves sideways or drifts downward
within a channel—that forms the handle.
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The handle may also take the form of a triangle.
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The handle needs to be smaller than the cup.
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Also, the handle should not drop into the
lower half of the cup, and ideally, it should
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stay in the upper third.
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So there are 4 different stages that lead
to this pattern.
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1.
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1st stage, from A to B: cup and handle pattern
starts forming when the market starts going
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down strongly.
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The down movement forms the left side of the
cup.
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2.
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Second stage, from B to C: after a while of
having a strong bearish market, bears becomes
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exhausted so the down movement becomes slower,
and we will have a sideways market for a short
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period of time.
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This sideways movement forms the bottom of
the cup.
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3.
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Third stage, from C to D: the bulls take the
control and the market starts going up strongly,
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like when it started going down strongly at
the beginning of the formation of the cup.
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This strong up movement forms the right side
of the cup.
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4.
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Forth stage, from D to E: after a period of
going up, the bulls become exhausted too,
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and so the market stops going up strongly
and forms a small sideways section which is
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the cup’s handle.
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This part is very important because this is
where we can anticipate the next direction
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of the market.
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A cup and handle chart may signal either a
reversal pattern or a continuation pattern.
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A reversal pattern occurs when the price is
in a long-term downtrend, then forms a cup
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and handle that reverses the trend and the
price starts rising.
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A continuation pattern occurs during an uptrend;
the price is rising, forms a cup and handle,
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and then continues rising.
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Now, how to enter a cup and handle trade.
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Wait for a handle to form.
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The handle often takes the form of a sideways
or descending channel or a triangle.
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Look for buy entries when the price breaks
above the top of the channel or triangle.
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When the price moves out of the handle, the
pattern is considered complete, and the price
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is expected to rise.
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While the price is expected to rise, that
doesn't mean it will.
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The price could rise a little and then fall,
it could move sideways, or it could fall right
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after entry.
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For this reason, a stop-loss is needed.
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Place a stop-loss below the lowest point of
the handle.
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If the price oscillated up and down a number
of times within the handle, a stop-loss might
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also be placed below the most recent swing
low.
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Since the handle must occur within the upper
half of the cup, a properly placed stop-loss
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should not end up in the lower half of the
cup formation.
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By having the handle and stop-loss in the
upper third (or upper half) of the cup, the
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stop-loss stays closer to the entry point,
which helps improve the risk-reward ratio
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of the trade.
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The stop-loss represents the risk portion
of the trade, while the target represents
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the reward portion.
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Picking a target or an exit point is easy.
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Whatever the height of the cup is, add that
height to the breakout point of the handle.
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You have to plot a horizontal line above the
handle’s highest level.
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The distance of this line from the bottom
of the cup is the size of the up movement
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that will occur after the handle resistance
breakout.
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In this example, i have plotted a horizontal
line above the handle highest high, then another
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horizontal line below the lowest low of the
cup.
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This is the distance of these two lines.
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If we had taken a long position after the
handle resistance breakout, we expected that
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the market would go up for the same distance.
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This is called a projection target.
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As you can see, the market did reached its
projection.
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Sometimes the left side of the cup has a different
height than the right one.
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Use the smaller height, and add it to the
breakout point for a conservative target.
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Or use the larger height for an aggressive
target.
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A Fibonacci extension indicator may also be
used.
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Draw the extension tool from the cup low to
the high on the right of the cup, and then
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connect it down to the handle low.
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The 100% level, represents a conservative
price target, and 162%, is a very aggressive
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target.
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If you're day trading and the target is not
reached by the end of the day, you could close
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the position before the market closes for
the day.
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A trailing stop-loss may also be used to get
out of a position that moves close to the
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target but then starts to drop again.
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Now, let’s discuss several important observations
that will increase the odds of finding the
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best cup and handle patterns.
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Traditionally, the cup has a pause, or stabilizing
period, at the bottom of the cup, where the
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price moves sideways or forms a rounded bottom.
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It shows the price found a support level and
couldn't drop below it.
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This helps improve the odds of the price moving
higher after the breakout.
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A v-bottom, where the price drops and then
sharply rallies may also form a cup.
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Some traders like these types of cups, while
others avoid them.
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Those that like them, see the v-bottom as
a sharp reversal of the downtrend, which shows
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buyers stepped in aggressively on the right
side of the pattern.
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Opponents of the v-bottom argue that the price
didn't stabilize before bottoming, and therefore,
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the price may drop back to test that level.
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Ultimately, if the price breaks above the
handle, it signals an upside move.
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My preference is to have a u-shape bottom
and not a v-shape bottom.
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Also, if the trend is up, and the cup and
handle forms in the middle of that trend,
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the buy signal has the added benefit of the
overall trend.
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In this case, look for a strong trend heading
into the cup and handle.
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For additional confirmation, look for the
bottom of the cup to align with a longer-term
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support level, such as a rising trend line
or moving average.
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If the cup and handle forms after a downtrend,
it could signal a reversal of the trend.
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To improve the odds of the pattern resulting
in a real reversal, look for the downside
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price waves to get smaller heading into the
cup and handle.
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The smaller down waves heading into the cup
and handle provide evidence that selling is
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losing steam, which improves the odds of an
upside move if the price breaks above the
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handle.
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Here are several cup and handle patterns,
on different markets.
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The classic cup and handle pattern has its
bearish equivalent – the bearish cup & handle,
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or the inverted cup & handle, which is a mirror
image of the standard pattern.
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Therefore, the bearish cup and handle is upside
down.
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The bearish cup & handle starts with a bullish
price move, which gradually slows down and
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turns into a bearish move.
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The handle of the pattern is slanted upwards.
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The confirmation of the pattern comes when
the price action breaks the channel of the
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handle in the bearish direction.
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If you look at this example, you can see the
bearish cup and handle pattern on this chart.
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Notice that the pattern comes after a bullish
trend, which means it acts as a reversal in
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this case.
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Also notice how the pattern starts with a
bullish trend, which gradually reverses.
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In this manner, the created top is rounded.
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At the end of the reversed bearish move, the
price reverses again and starts the creation
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of a bullish handle.
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After the price breaks the handle downwards,
we see the creation of a new bearish move.
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The target is located on a distance equal
to the size of the cup, applied again from
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the moment of the breakout and the stop loss
order is located above the handle.
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The cup and handle chart pattern does have
a few limitations.
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Firstly, it does not occur within a specific
timeframe.
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Sometimes it forms within a few days, but
it can take up to a year for the pattern to
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fully form if you’re trading on higher timeframes.
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Secondly, you need to learn to identify the
length and depth of a true cup and handle,
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as there can be false signals.
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Here is another important tip: the longer
and rounder the bottom, the stronger the signal.
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Also remember that the cup should not be ‘v’
shaped or too deep.
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If you learned something new and found value,
leave us a like to show your support and don’t
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forget to subscribe and hit the bell icon
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Until next time.
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