Cup and handle model, also known as Cup handles. It is one of the important models in the field of forex investment. In particular, it is one of the popular models that investors often apply in technical analysis. Let’s explore with Forex Trading the details of this cup and handle model now!
Explore an overview of the Cup handles
One of the popular patterns that often appear in super stocks. It brings significant profits and is popular with many investors. It’s a cup and handle pattern. So, what is this model? What characteristics does it have and how to trade in the foreign exchange market?
What is the cup with handle model?
Cup handles, also known as Cup and Handle pattern. This is a popular price pattern in the market, often used in combination with Japanese candlestick pattern. It is shaped like a cup with a handle, with the body forming a “U” shaped curve. The strap or handle forms a smaller curve. Form a “V” shape within the larger “U” section.
This pattern was popularized in the 1980s by technical analyst William J. O’Neil. He did not invent the cup and handle pattern. He perfected it by describing in detail its characteristics and formation process.
Today, cup and handle patterns are classified into two types based on characteristics and time of appearance. Right and reverse cup-handle patterns.
- Positive pattern: Usually appears in an uptrend market. Shaped like a cup. After the breakout, the price usually continues to rise following the previous trend.
- Inverse pattern: This can appear in both bullish and bearish markets. The shape of the cup and handle is opposite to the normal shape. When the price breaks through the handle area, there will usually be a sharp decline.
Learn the structure of the Cup handles
As its name suggests, the cup and handle pattern has two main parts: the cup and the handle. Described as follows:
- Cup: After a series of declines, stock prices often show signs of bottoming out and begin to rise. Aim to form a cup-like shape (usually a “U” or sometimes a “V” shape).
- The handle: When the stock price rises near the top of the cup, many investors begin to sell to gain profits or return to their original capital. This often leads to a decrease in price, forming a correction phase. As supply dwindles and buyers prevail, the stock price will surpass the handle. At that time, the cup and handle pattern is completed.
See more: Master the Forex “game” with Price action
Characteristics of forming the inverted Cup handles
Important things to note when identifying Cup handles :
Cup part:
- A price increase of at least 30% is needed before the cup portion begins.
- The formation time is usually from 7 to 65 weeks.
- The adjustment ratio from the Top of the cup to the Bottom of the cup is usually from 12-15% to 40-50%.
- A “U” shaped cup bottom is more reliable than a “V” shaped cup.
- The tops of the cup on the right and left do not have to be equal.
Handle part:
- Time is usually 1-2 weeks.
- Trading volume needs to be small and liquidity low.
- Some cases do not have a handle, but the success rate is usually lower.
- The handle is usually located on the MA200 level and at the top of the cup.
- Usually, the adjustment rate from the handle is between 10-15%.
- Breaks out of the handle are often accompanied by increased trading volume.
Effective trading strategy with Cup handles
During the coke formation stage, the stock price falls and sellers become fewer. When the price drops to an attractive level, investors begin to accumulate shares. As price increases and trading volume increases, the remainder of the cup is formed.
The line connecting the two rims of the cup creates a level of resistance. When the price touches this zone, those holding stocks from the old peak often sell to recover capital. However, demand is strong enough to keep the stock in an uptrend.
When the stock price rises again, the handle of the cup is formed. This uptrend often breaks out through resistance levels.
How to trade the cup and handle pattern is as follows:
Order entry time
Entering orders at the bottom of the handle is a popular strategy. A point one-third of the height of the pattern from the top of the cup is generally considered the ideal position.
When the price breaks out of the handle, this pattern is gradually completed. However, you should not chase when the price increases more than 5% from the top of the handle.
Entering orders in the retest zone only occurs when a retest occurs. Investors will enter orders when the price returns and touches the previously broken support line. However, the opportunity may be missed without a retest.
Technical analysis with a Price Target
To take advantage of an early buy point at the bottom of the handle when the pattern is not yet complete, set a short-term target at the resistance line passing through the rim of the cup. Once the price has broken out of the handle area and the pattern is complete. You should consider selling stocks to make a profit:
- Sell each part when the expected profit has been achieved.
- Sell partially at the previous resistance zone.
- When a stock shows signs of peaking or breaking a trend, consider selling.
When to perform Cutlass
Each investor should follow his or her principles and not depend on the majority opinion. Based on the cup model, we can choose the time when the price breaks the resistance line through the rim of the cup. Or when the price increases from 5% to 7% compared to the purchase price.
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How to effectively manage orders with the Cup handles
This pattern offers three entry opportunities, including reversal candlestick patterns. If you want to take higher risks to achieve greater profits, you can use all three of these opportunities. But how can we manage them?
If you usually set your Stoploss at 2%, this time you can accept 1% more risk. Divided into three parts, that means each time you enter a trade you will accept a 1% risk.
You will enter an order with 1% of capital when the price reaches the bottom of the cup after adjustment. Halve the position when the price reaches the top of the cup. If the price turns back and touches the Stoploss, you still keep your capital.
Next, if the price rebounds and creates a handle, you continue to enter the order with 1% of capital and halve the position when the price reaches the top of the handle. If the price does not break the handle and return to hit the Stoploss, you will collect capital and at the same time halve the long position at the bottom of the cup.
If the price breaks the handle, you will continue to halve the position and hold until the target.
Before applying this pattern, make sure that the currency pair has increased by at least 30% before. This ensures that the currency pair is in a strong uptrend. Adjusting to create the model is just the next step in preparing for a new price increase.
Conclude
In short, Cup handles offers many benefits. However, it should be remembered that in practice, model validation is not as simple as in theory. It requires long periods of observation. Investors should establish personal principles in trading, applying reasonable stop-loss points. Also, use a range of different indicators instead of following a rigid approach. Hope the information from Forex Trading will help you. Good luck!
Frequently asked questions
In what situations on the chart does the pattern often appear?
Cups and handles often appear after a sale. This showed a reversal of the market trend. Or maybe after a price increase and showing continued market growth.
How to trade on the cup and handle?
Cup and handle trading typically involves placing a buy order when the price breaks out of the handle. Set a higher profit target.
What are the advantages and disadvantages of this Cup handles?
The cup and handle pattern has the advantage of being easily identifiable and providing a trading opportunity with a reasonable risk rate (RR). However, its disadvantage is that it does not always guarantee success. You may need confirmation from other patterns.
