Cup And Handle Pattern: How To Identify And Take Leverage Of It?

Most traders often combine multiple indicators to confirm their predictions. It helps them understand the future of the coin and boosts confidence. It is very common for traders to invest after identifying patterns or flags.

The cup and handle indicator is a technical pattern visible on cryptocurrency price charts. It is possible to see the correction of a previous uptrend, and eventually its continuation. The pattern displays clearly defined entry and risk levels, but because volume metrics in the crypto markets are dispersed, it can be challenging to interpret the pattern.

This trading manual discusses the value of patterns and how to develop a strategic trading approach to get the most out of them. We’ll go over the indicator’s specifics and some of its limitations.

Key takeaways

The cup-and-handle pattern depicts a form that resembles a cup or the letter “U” and a handle.

The U shape or cup form represents a sharp decline followed by a recovery that brings the price back to where it was before it declined.

The handle mostly represents a small slip showing a rally on the chart.

Technical traders using this indicator should set a stop-buy order just above the upper trendline of the handle.

What is cup and handle pattern?

As its name suggests, a cup and handle price pattern forms a cup with a handle on the crypto price chart. The cup is shaped like the letter “u” on the price chart, and the handle is slightly skewed downward.

The cup and handle pattern is regarded as a bullish signal, and lower trading volume is frequently seen on the right side of the pattern. The time it takes for the pattern to form can range from seven weeks to 65 weeks.

For example, if a cup forms between $22,185 and $23,556, the handle should form between $23,556 and $22,350, ideally between $23,500 and $22,200. Avoid trading the pattern if the handle dives too far and wipes out the majority of the gains of the cup.

This pattern can be seen in charts with short time horizons, such as one minute charts, as well as charts with longer horizons, such as daily, weekly, and monthly charts.

Typically, a cup and handle chart denotes a bullish continuation pattern. A continuation pattern develops during an uptrend: the price rises, forms a cup and handle, and then rises. In some instances, the pattern may signal a turn around when the price is in a protracted downtrend. Eventually, the price starts to increase as it forms a cup and handle and reversing the trend.

Example of cup and handle pattern

In the chart given below, SHIB/USDT reflects a cup shape pattern starting from November, 2022 and ending in February, 2023. The price in November, 2022 was $0.00001312, and in February it was somewhere between $0.00001400. The handle formation reflecting a slight drift also took place in February 2023. The price slipped from $0.00001523 to $0.00001250. Later, the coin is seen correcting. The price is showing a minor surge from $0.00001250 to $0.00001312. The neckline resistance at $0.00001523 is maintained the entire time. Therefore, it isn’t the right time for order execution.

A stop buy order should be placed just above the handle’s upper trend line. Please be aware that an order should only be executed if the price surpasses the pattern’s resistance. Traders who use an aggressive entry may encounter excessive slippage and enter a false breakout.

When identifying cup and handle patterns, it’s essential to keep these things in mind:

  • Depth: The cup shouldn’t be bottomless. Also, avoid too deep handles; handles should form in the upper half of the cup pattern.
  • Length: The bottoms of cups with longer and more “U” shaped shapes typically provide a stronger signal.
  • Volume: Volume should rise when the stock moves higher, returning to test the previous high. It should signal a shift as prices decline and continue to be below average in the bowl’s base.

A retest of prior resistance doesn’t need to touch or be several ticks away from the old high. However, the further the handle’s top is from the highs, the bigger the breakout must be.

How to trade the cup and handle?

The most straightforward strategy for trading the cup and handle is to look for opportunities to enter a long position. Mark a stop-buy order above the handle. Until the price breaks the resistance of the pattern, order execution should not take place. Traders who use an aggressive entry may encounter excessive slippage and enter a false breakout.

Alternately, watch for a price close above the handle’s upper trend line before placing a limit order just below the pattern’s breakout level and hoping for execution if the price retraces. If the price keeps rising and does not reverse, there is a chance of missing the trade.

Read More: Hammer Candlesticks: How To Use This Indicator To Increase Crypto Profit