There are patterns in crypto like there are patterns in nature. If you learn to spot them, you can have an enormous advantage over the average trader. The cup and handle chart pattern is one of these patterns, and once you understand what it means and how to trade it, your bottom line can benefit immensely.
The cup and handle chart formation in crypto can be as useful in predicting the future of cryptocurrency prices as any other chart pattern cup and handle in traditional markets such as stocks, bonds, and commodities.
The best part? Cup and handle technical analysis is relatively simple to spot and makes it easy to know when to buy or sell your cryptocurrency holdings. However, it isn't foolproof, and you should always double-check your data before making any financial decisions based on technical analysis alone. Here's what you need to know about this pattern and how it can help you maximize your profits when the next run comes.
What Is a Cup and Handle Pattern?
A cup and handle is a technical analysis chart pattern that resembles a rounded bottom followed by a sideways movement or handles. The cup portion of the pattern is created when the price falls and creates a U-shaped bottom.
The handle portion of the pattern forms when the price consolidates sideways after the cup is formed. A breakout from the handle can signal an upcoming bullish move.
However, for this cup and handle formation to be considered valid, there should be at least five to six weeks of horizontal trading within the cup before it begins rising again. The target for this type of pattern is typically between 50% and 61% retracement.
What Does Cup and Handle Mean?
The cup and handle chart pattern is considered a bullish signal, as it indicates that the price of an asset is likely to continue rising. The pattern is created when the price of an asset forms a cup shape, followed by a brief dip (the handle).
This dip allows traders to buy the asset at a lower price before the price resumes its upward trend. The cup and handle formation might indicate a potential future upward trend in the crypto market if traders buy into it early enough.
Additionally, trading cup and handle patterns require patience, as they typically take weeks or months to form. A breakout from the handle can be used as a signal to enter a long position. Similarly, a breakdown from the cup can be used as a signal to enter a short position.
Limitations and Advantages of a Cup and Handle Pattern
How to Trade the Cup and Handle
The handle needs to be smaller than the size of the cup. For example, if the price of a product ranges from $100 to $200, ideally, the handle (high-to-low) should range between $200 and $150.
Recognizing Cup and Handle Patterns
The cup-and-handle pattern usually appears in longer time frames, from monthly to yearly. It is one of many chart patterns traders use for making long-term forecasts about a stock's direction. The theory behind chart patterns is that investors tend to follow well-worn paths.
On daily and monthly charts, this pattern is seen when an outgoing downward price wave is followed by a period of stabilization.
Entering a Cup and Handle Trade
Look for the handle formation. It's often described as a side or descending channel or a triangle. When the price breaks above the top of the channel or triangle, then you should buy.
Once the price moves out of the triangle, the pattern is complete, so you expect it to go up. Even though it's expected to increase, that doesn't mean it will.
The price may not rise significantly but increase for a short period and then go back down. It could go in different directions, even after your trade is triggered. To account for this, a stop-loss is necessary.
The cup and handle pattern is typically seen as a continuation signal, which means it's often found in the middle of an uptrend. When traders see this chart pattern form, they may want to buy on the assumption that there will be more bullish moves in the trade.
Setting a Stop-Loss
Generally, when trading cryptocurrencies, it's advisable to set a stop-loss. A stop-loss is an order you place with a cryptocurrency exchange to buy or sell asset when it reaches a certain price. The main purpose of a stop-loss is to limit your losses in case the market goes against you.
For example, suppose Bitcoin was currently trading at $6,000, and you wanted to set a stop-loss at $5,000 as soon as Bitcoin falls below $5,000 for any reason. In that case, the exchange automatically closes your trade, and all losses will be limited to around 10%.
In this order, a stop-loss is used to prevent traders from staying in a trade if there is no breakout from the cup-and-handle pattern. The order triggers a sale when the asset price falls far enough to nullify the pattern.
When the price oscillates continuously, a stop-loss can be placed below the most recent swing low. At this point, once the new rally resumes and reverses course back up to test the level of support again, we have a valid Cup and Handle chart pattern.
This strategy places the handle and the stop-loss in the cup's upper third (or upper half) so that the stop-loss stays close to the entry point, improving the risk-reward ratio. The stop-loss covers the possibility of risk in the trade, while the target represents the likelihood of a potential reward.
Choosing a Profitable Exit or Target
Wherever the height of the cup may be, add it to the measurement from the breaker point of the handle. That is the target height.
You might notice that the cup's left side is slightly shorter than the right. If you want to be conservative with your predictions, make your target-marking point that same distance from the side. An aggressive target can also make use of a higher height.
In this method, you should extend a Fibonacci tool from the cup low to the high on its right and then connect it to the cup low. Now you will have two points on your chart - one on the right and one on the left.
Extend a Fibonacci line again from each point (the original one at the bottom) and then go through what would be vertical extensions at those points, again connecting them back to their respective lows. From there, draw two lines across these new extensions of 3% (or 1%) respectively.
What Is a Cup and Handle Breakout?
A cup and handle breakout indicates a bullish signal in an uptrend, and it is a chance to go long. It’s what follows the cup and handles pattern.
Cup and Handle Pattern Target Examples?
Here is a real-world historic example using Wynn Resorts Limited; the asset that went public on the Nasdaq exchange, close to $13, dating back to October 2002, only for it to rise to $154 five years later.
It finds support at the 50% retracement in a rounded shape due to pullback and returns to the high for a second time 14 months later. In the five months following its breakout in October 2013, the stock gained 90 points.
Cup and Handle Formation a Continuation Pattern
Nifty displays a Cup and Handle pattern formed over about two years (photo below). A breakout from the pattern and a gap-up confirmed further gains.A vertical blue line on the cup shows that the minimum target was reached in less than a year.
Cup and Handle Formation as a Reversal Pattern
Here is another example of the Cup and Handle Formation (photo below), a pattern formed by the recent formation of a reversal in Dhampur Sugar. The handle resembles an ascending triangle pattern, and the stock saw a sharp increase after the breakout in 2-3 weeks. Nevertheless, the minimum target is yet to be reached in this stock, which is expected to be reached in the following week(s).
Is Cup and Handle Bullish?
The cup and handle formation is generally considered a bullish price formation. William O'Neil, the term's inventor, identified four primary stages in a cup and handle formation.
- Approximately one to three months before the cup pattern begins.
- Asset reaches a new high in an uptrend. If the asset retraces, it will drop no more than half its previous high.
- The asset will return to its previous price.
- The high parts of the formation are followed by the declines, forming the "handle."
In the end, security breaks out again, surpassing the cup depth at its lowest point.
You can think of this as the consolidation before the final rise.
The bullish cup and handle formation often signals that a bear market has ended and prices are set to resume their upward momentum. Traders who know how to recognize this pattern may be able to identify entry points in advance and maximize their profit potential during these periods of prolonged uptrends.
Frequently Asked Questions
What is the Best Way to Find a Cup and Handle Formation?
Assume a stock recently hit a high after strong momentum but has declined almost 50%. At this point, investors might consider purchasing the stock, predicting it will bounce back to the previous levels.
As the stock rebounds from the previous high, it tests the previous high resistance levels, followed by a sideways trend; ultimately, the stock soars 50% above these resistance levels. To find a cup and handle formation, look for.
- A recent high (the cup).
- An even higher high (the handle).
- Some sort of price consolidation before breaking out.
- If the breakout occurs with increased volume.
What Does a Cup and Handle Formation Indicate?
A cup and handle chart pattern is a technical analysis tool that can predict future price movements.
The pattern is formed when the price of an asset forms a cup shape, followed by a handle smaller than the cup.
The cup and handle pattern is generally considered bullish, indicating that the asset's price is likely to increase. A breakout from the handle can be used as a signal to enter a long position.
Similarly, a breakdown from the cup can be used as a signal to enter a short position. These two strategies are known as Cup and Handle Trading.
Essentially, a cup and handle signify a downward trend accompanied by a price fluctuation. This drop, or "handle," indicates a potential opportunity for buying the asset.
Conversely, after the price formation of a cup and handle pattern has finished, the security will likely reverse course and reach new highs. Typically, these patterns last between three weeks and a year.
A cup and handle breakout occurs when the value of the stock breaks out from a cup shape. It should not be confused with a breakout trade during a down-trending market. In other words, if there was no uptrend in the first place, you cannot have any down breakouts since there is no pressure on prices.
The cup is broken when prices rise above the upper curve of the cup, creating a new cup. If the price breaks below the bottom curve of the cup and continues downward, then we say that we have formed a broken or dirty cup.
Once a Cup and Handle Formation Is Completed, What Will Happen?
When a cup and handle pattern is confirmed, a bullish price movement should follow the price target based on the cup's size, but it will move upward following the initial breakout; the future is less clear to see the cup and handle pattern, so it’s important to zoom out and take a look at a higher time frame.
What is the longer-term trend? Is the volatility decreasing or increasing? Are these larger contextual clues helpful if you're planning on keeping positions after the initial breakout?
Two waves identify a cup and handle formation - the first wave down to form the cup, followed by a second wave with slight retracement before making new highs forming the handle.
After a Cup and Handle Pattern Forms, What Happens?
If a cup handle pattern develops and is confirmed, the price should rise sharply in the medium to short term. If the pattern fails, no bull run will occur.
The same goes for an upside breakout: if there is a bullish breakout, this could indicate that we are about to see an uptick in the market, and prices may continue increasing. If it does not happen, it can be evidence that another bearish cycle is coming.
How would you like to spot market trends before they happen? That's the idea behind charting, which has long been popular among professional traders and investors. You may have seen charts in the financial news, on TV, or in print, and might even have heard terms like a cup and handle or head and shoulders.
If so, you're already halfway to being able to use this information yourself. Trading the cup and handle formation can be profitable if done correctly; however, waiting for a confirmed breakout is important before entering a trade. So it’s important to make your trading decision with additional confirmation (indicators)!
*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.