The ‘Cup with Handle’ is a continuation pattern in Forex technical analysis. This pattern was introduced and popularized by the famous American trader William O’Neil and came to the foreign exchange market from the stock market.
It should be noted immediately that the ‘Cup with Handle’ is a continuation pattern of only an uptrend. Let’s examine the conditions for forming this candlestick pattern, ways to apply it in trading, as well as some features.
Conditions for Forming the ‘Cup with Handle’ Pattern
- The main condition for forming the continuation pattern ‘Cup with Handle’ is the presence of a bullish trend.
- How does the ‘cup’ form? The left wall of the cup represents a correction to the previous upward movement, the bottom of the cup – a consolidation phase, which can take the form of a trough, the right wall of the cup – an upward movement. The depth of the correction (the cup) should not exceed 80% of the previous trend.
- How does the ‘handle’ form? Essentially, the handle is a price correction to the right wall of the cup. Usually, this correction takes the form of the TA pattern ‘Flag’. Visually, the handle starts where the right wall of the cup ends. A mandatory condition is the depth of the correction (length of the cup handle) less than 50% of the right wall of the cup.
- The ‘Cup with Handle’ pattern forms for a long time. The longer the formation, the stronger the trend continuation will be.
- The technical analysis pattern ‘Cup with Handle’ can be considered fully formed only after the price breaks through the resistance level.
- During the formation of the left wall of the cup, trading volumes gradually decrease, during the formation of the bottom of the cup, they remain low and begin to increase during the formation of the right wall of the cup. During the breakout of the resistance level, there is a sharp increase in trading volumes.
How to Distinguish a True ‘Cup with Handle’ Pattern from a False One?
Despite the apparent ease of identifying the ‘Cup with Handle’ pattern, there is always a possibility that the pattern may turn out to be false. You can determine the authenticity of the ‘Cup with Handle’ TA pattern by several signs:
- A strong uptrend preceded the formation of the ‘Cup with Handle’ pattern. Otherwise, there can be no talk of any cups.
- The reliability of the ‘Cup with Handle’ pattern depends on the timeframe. The older the timeframe, the more reliable the pattern.
- The breakout of the resistance level may turn out to be false, and the price may return below it. This scenario often happens if the cup handle is too ‘long’. An optimal handle size is when it is 5-15% below the maximum of the right wall of the cup.
- The correctness of the ‘Cup with Handle’ pattern can be determined mathematically. To do this, find the average between the maximum of the left wall and the minimum of the cup’s bottom. Similarly, calculate the average value for the maximum and minimum of the handle. Then compare the two values. In a true ‘Cup with Handle’ pattern, the average value of the handle will be higher than the average value of the cup.
- Another criterion for the authenticity of the ‘Cup with Handle’ pattern is the position of the handle relative to the moving average with a period of 200. In a true pattern, the handle is above the MA (200).
Trading Rules for the ‘Cup with Handle’ Pattern
You can use the ‘Cup with Handle’ pattern in trading in three ways:
- Standard Method
This method involves opening a position after the resistance level is broken. A stop-loss is placed below the candle that broke the resistance.
- Aggressive Method
As we mentioned earlier, the cup handle usually represents a ‘Flag’ pattern. The aggressive method involves entering the market after the ‘flag’ is broken. A stop-loss is placed below the candle that broke the ‘flag’.
