HOW TO TRADE CUP AND HANDLECHART PATTERN

in-depth tutorial

CUP AND HANDLE EXPLAINED

CUP AND HANDLE ILLUSTRATION

Bullish "Cup and Handle" chart pattern illustration
Direction: Continuation
Type: Bullish
Occurrence: Low
Common term: Long

CUP AND HANDLE PRICE ACTION STRUCTURE

  • In an uptrend, price action finds first resistance 1, where it reverses direction and goes downwards steadily till finding first support 2, which will be the lowest low in the pattern.
  • Price action reverse direction from support 2 and goes upwards steadily, till finding the second resistance 3 and completes the cup formation.
  • Price action reverse direction from resistance 3 and goes downwards, till finding the second support 4, which must be higher than the first support 2.
  • The pattern is completed when price action reverse direction from 4 and goes upwards till it breaks the cup and handle surface at point 5.

NOTES ON CUP AND HANDLE

  • The cup and handle surface is identified by drawing a trend-line connecting both resistances of the cup formation (1 - 3).
  • Handle formation might be shaped as a flag facing away from the surface.
  • Cup and handle surface can be skewed.
  • Volume usually decreases as the pattern is being formed, and increases when breaking the surface or retesting the breaking rate.
  • This pattern is commonly found on long-term time-frames.

HOW TO TRADE CUP AND HANDLE

  • Trade entry: the pattern is traded after price action breaks the surface at point 5, either with an entry after the breakout, or after a -possible- retest to the breaking rate.
  • Take profit: identified by measuring the vertical distance from the the cup's peak 2 to the cup's second resistance 3, that measurement is then applied from the breakout point 5.
  • Stop loss: can either be the the breaking point 5, or the handle's peak 4.

CUP AND HANDLE REWARD:RISK

  • When using the handle's peak 4 as stop loss, the pattern's R:R will be better when the handle's height (4 - 5) is relatively short compared to the cup's height (2 - 3).
  • When using the breaking point as stop loss, the pattern's R:R will depend on the (entry rate - breaking rate) distance, compared to the height of the cup formation (2 - 3).
  • Always remember that both stop loss levels explained above are absolute, the actual stop loss rate for your trade setup should be a bit beyond those levels to give the trade setup some room to breathe, and of-course calculations for position size and R:R should be done with respect to those rates.

CUP AND HANDLE REAL EXAMPLE

Real example for a bullish "Cup and Handle" chart pattern, using the H4 of EUR/USD on Oanda's MT4 platform
Currency pair: EUR/USD
Timeframe: H4
Breakout: 14-Dec-2012
Platform: MT4
Broker: Oanda

CUP AND HANDLE FOREX TRADE SETUP

  • Trade entry: at the closing rate of the candle after breaking the surface at point 5
  • Take profit: 434.4 pips - usual measurement applied from point 5
  • Stop loss 1: 96.8 pips (R:R 4.488) - set at 14% of target measurement, beyond absolute SL1
  • Stop loss 2: 312.6 pips (R:R 1.390) - set at 7% of target measurement, beyond absolute SL2

NOTES ON THIS TRADE SETUP

  • In this example, the retracement after entering the trade reached SL1, which would result in a loosing trade if that stop loss level was used.

INVERSE CUP AND HANDLE EXPLAINED

INVERSE CUP AND HANDLE ILLUSTRATION

Bearish "Inverse Cup and Handle" chart pattern illustration
Direction: Continuation
Type: Bearish
Occurrence: Low
Common term: Long

INVERSE CUP AND HANDLE PRICE ACTION STRUCTURE

  • In a downtrend, price action finds first resistance 1, where it reverses direction and goes upwards steadily till finding first support 2, which will be the highest high in the pattern.
  • Price action reverse direction from support 2 and goes downwards steadily, till finding the second resistance 3 and completes the cup formation.
  • Price action reverse direction from resistance 3 and goes upwards, till finding the second support 4, which must be lower than the first support 2.
  • The pattern is completed when price action reverse direction from 4 and goes downwards till it breaks the cup and handle surface at point 5.

INVERSE CUP AND HANDLE REAL EXAMPLE

Real example for a bearish "Inverse Cup and Handle" chart pattern, using the H4 chart of CAD/JPY on Oanda's MT4 platform
Currency pair: CAD/JPY
Timeframe: H4
Breakout: 09-Jan-2015
Platform: MT4
Broker: Oanda

INVERSE CUP AND HANDLE FOREX TRADE SETUP

  • Trade entry: at the closing rate of the candle after breaking the surface at point 5
  • Take profit: 389.3 pips - usual measurement applied from point 5
  • Stop loss 1: 104.6 pips (R:R 3.722) - set at 21% of target measurement, beyond absolute SL1
  • Stop loss 2: 199.5 pips (R:R 1.951) - set at 7% of target measurement, beyond absolute SL2