Most technical traders are familiar with the cup and handle pattern because it’s one of the oldest chart patterns in technical analysis. Since the pattern takes some time to form, it’s quite reliable.
The pattern is easy to spot because it looks like a cup with a handle. The cup refers to the rounding of price action close to a series of lows. In the cup pattern, there is a left, a base, and a right side.
The pattern has one major characteristic: volume is usually heavy on the left, light in the middle part, and then tries to pick up again at the right side of the cup. Traders spot a minor pullback when price approaches the top of resistance and the handle forms.
Traders need to know that when they are looking for trading patterns, it’s not necessary to come up with precise measurements for your patter; in fact, it’s a waste of time.
Here is a table showing the reaction of the cup and handle pattern:
Three strategies for trading the cup and handle pattern
Here are three trading strategies of the cup and handle pattern.
Trade with a Strong Handle
A strong handle breakout is a point where the pattern displays significant strength in terms of volume, price action, and speed.
Before traders proceed to trade the cup and handle pattern, they should remember that all handles will not form equally. The exciting thing about this pattern is the fact that the handle, which is the smallest part of the pattern, is the most important.
The handle represents a catalyst or catapult that sends assets screaming higher.
The handle consists of at least four candlesticks but doesn’t exceed ten on a five-minute time frame. Also, traders should time box the handle because it prevents the scenario of getting trapped in a sideways conundrum.
The handle should have candles that are in a very tight range with small bodies.
When the breakout occurs, it should produce significant volume and price expansion. The breakout candle should close above the resistance line of the handle.
In summary, the breakout move needs strong volume after the quiet period of forming the cup and handle pattern.
Here is a chart showing a strong cup and handle pattern:
Sell at the supply line
It is not a good idea to take the depth of the cup and add it to the breakout value as a method of setting your price target. This approach worked in the past when only a few traders performed technical analysis.
These days, the market will prevent a trader’s asset from making its run to the preferred price point.
There’s always a better way of setting targets that will account for specific trading patterns using trend lines. If traders notice that an asset is close to hitting a target but fell a bit short, they can apply the logic of the upper resistance line on the charts or sell the supply.
This image shows price reacting at the supply line of the cup and handle pattern:
Buy on the cross of the cloud
This strategy involves a complex indicator called the Ichimoku. The Ichimoku cloud is a technical indicator. It shows momentum, trend direction, support, and resistance levels. The indicator functions by taking multiple averages and plotting them on a chart. The Ichimoku also uses figures to calculate a cloud that forecasts where price may find resistance or support in the future.
The strategy is simple. When the candlestick closes above the Ichimoku cloud, buy the cup and handle breakout.
Traders who aren’t familiar with this indicator should look out for when the asset can close above the cloud convincingly, which is an additional confirmation of the strength of the trend. If the trend doesn’t close above the cloud, it means that the bears have the market and traders should avoid going long.
The bottom line
When traders understand the strategies behind the cup and handle pattern, it increases their chances of succeeding as it’s one of the most profitable chart patterns. The strategy also offers traders an effective way of exploiting the pattern.
However, traders should backtest the pattern on a demo account a few times to improve their ability to spot the cup and handle before trading real funds.