If you are studying a price action, you should definitely know Cup and Handle formation.
Being applied properly, it can generate big profits.
In this educational article, I will teach you how to identify this pattern. We will discuss its psychology and I will share with you 2 trading strategies.
📏And let's start with the structure of the pattern.
The pattern has 3 important elements:
Cup - long-term correctional movement that tends to move steadily from a bearish trend to a bullish trend.
Handle - short-term correctional movement with signs of bullish strength.
Neckline - upper horizontal boundary of the pattern - a strong resistance that the price constantly respects.
⚠️Being formed, it warns you about a highly probable coming bullish movement.
The trigger that confirms the initiation of a bullish wave is a breakout of the neckline of the pattern and a candle close above.
Here is the example of a completed C&H with a confirmed neckline breakout, indicating a highly probably coming bullish movement.
Depending on the preceding price action, Cup & Handle Pattern can either be a trend-following or reversal pattern.
📉If the pattern is formed after a bearish impulse. It is considered to be a reversal pattern.
Here is the example of a reversal C&H that I spotted on EURUSD.
📈If the pattern is formed at the top of a bullish impulse, it is considered to be a trend following pattern.
Here is the example of a trend following C&H that I spotted on GBPJPY .
The thing is that while the price forms the C&H, buying volumes are accumulating. Even though, buyers are hesitant and reluctant initially, their confidence grows, and the accumulation leads to explosive neckline breakout.
There are 2 strategies to trade this pattern.
✔️ Strategy 1.
That approach is quite risky, but the reward can be quite substantial.
You should monitor the price action when the price is forming a handle. Occasionally, the price starts trading in a falling channel: parallel or contracting one.
Your trigger will be a bullish breakout of its resistance and a candle close above.
Once the violation is confirmed, you can buy aggressively or set a buy limit order on a retest.
Stop loss will lie below the lows of the channel.
Target will be the closest key resistance.
Here is the example of the handle being a falling channel.
✔️ Strategy 2.
Wait for a breakout of a neckline of the pattern.
Once a candle closes above that, it will confirm the violation.
Buy the market aggressively or set a buy limit on a retest of a broken neckline then.
Stop loss will lie below the lows of the handle.
Target will be the closest key resistance.
Here is the example of the trade based on a confirmed breakout of a neckline of C&P on NASDAQ Index.
Applied properly, the strategies may reach up to 70% win rate.
As always, the best pattern will be the one that forms on a key level.
Try it, test it, and good luck in your trading journey.
