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What is the inverted cup and handle? How to trade

Inverted cup and handle is a chart pattern that appears during a downtrend and shows the possibility of a further decline in the future. This type of model has the opposite shape compared to the regular cup-with-handle model. So what components does the model include? And how to trade with cups and handles. Please refer to the article below from Forex Trading now!

General overview of Inverted cup and handle

To better understand this type of model, you can refer to the following information:

What are cup-of-handle and inverted cup-of-handle diagrams?

Cup with a handle is a price chart pattern in Forex and is often used as a technical indicator in trading. As the name suggests, this pattern has the price line forming a cup with a handle. It should be U-shaped and the handle should be a small U or V shape.

The inverted cup with the handle chart has the bottom at the top of the chart. The cup body is arc-shaped or U-shaped connecting the two bottoms. The mouth of the cup and handle is below the chart and is usually lower than the previous peak. The connection between the two peaks of the rim of the cup is called the resistance line.

Components that make up the cup-with-handle model

The cup and handle model includes two main components: the cup and the handle, or handle. As follows:

Cup part: Asset prices after a series of declines begin to show signs of bottoming and going up to form a U-shaped or V-shaped cup.
The cup body: The cup body usually appears after an uptrend. At this time, from the top of the cup to the bottom of the cup, the decrease is about 12-15% or maybe up to 30%. Sometime later, the price will increase from the bottom to the top of the cup. The two tops of the cup mouth are not equal, one low and one high, creating a resistance line slanted upward.

What is the meaning of the cup and handle pattern?

The cup-with-handle model shows investor hesitation after a sharp price drop. The handle is the accumulation phase when investors sell and investors continue to buy. The breakout zone will occur when the price breaks through the resistance line to indicate the possibility of further decline in the future.

See more: Analyze & forecast trend effective candlestick pattern

Instructions on how to identify Inverted cup and handle

This pattern is similar to the Bunting flag pattern which is often formed after a period of strong decline. Therefore, to identify an Inverted cup and handle, you need to consider some of the following criteria:

The bottom of the cup is formed by two price drops within a certain period. The bottom of the cup and handle pattern is at the top of the chart, in an arc or U shape. Usually, this part is no deeper than 50% of the previous decline.
The cup body is connected to the two bottoms of the cup and has a U-shaped or arc shape. For this part, the decrease will not be too deep. If the decrease exceeds 50%, this type of model will likely fail.
The mouth of the cup is located below the chart and will usually be lower than the previous peak.
On the other hand, the hand-held cup model represents the second price drop, so it is usually horizontal or upward. So it’s usually smaller and shorter than the first sale.
If you see that the volume of the cup handle is small, investors should not sell. Because if you leave, you may suffer a large loss of assets.

Instructions on how to trade effectively with an Inverted cup and handle

Below are some effective ways to trade with the cup-with-handle model, you can refer to:

The entry point for the cup-with-handle model

To enter an order with the cup and handle model, follow these steps:

The common way to enter an order is to do so at the bottom of the handle. This point is about 1/3 of the top of the cup compared to the height of the main model.
You can enter orders when breaking out of the handle when the model is complete. Note that you should not chase when the price increases more than 5% from the top of the handle.
In addition to the above two methods, enter commands in the restart area. But this zone only occurs when a retest occurs and the order is entered at the return price point. However, if this area does not appear, investors will proceed to eliminate this method.

The entry point is at the bottom of the cup

Handcup target price

With the point of buying the bottom of the handle early when the model is not yet completed. Investors should set short-term targets at the area where the resistance line passes through the cup. If you see the price breaking out of the handle area, you should consider selling the asset. To gain profits and avoid all kinds of risks. However, to achieve your goal you can keep in mind a few things:

Once a profit has been achieved, partial sales should be made.
At the previous resistance zone, you should sell partially but not completely.

Make a stop-loss

Based on the inverted cup and handle model, investors can choose the time to cut losses when the price breaks the resistance line. Or see the cup mouth shaped from top to bottom or at a time of 5% – 7% compared to the purchase price.

See more: Optimize trading with IC Markets Exchange

Some notes when using an Inverted cup and handle

When using the cup-with-handle model, there are a few things to keep in mind:

Identify market trends: The cup-in-hand model is only valid when it appears in a downtrend. Therefore, it is necessary to determine the market price trend before applying this model.

Trading Volume: Trading volume typically decreases during the bottom formation phase and increases during the breakout phase. Therefore, you should choose models with high trading volume to increase reliability.

Technical indicators: These can be combined with other technical indicators such as MACD, RSI, and Stochastics. You can also use some 3 black crows pattern, and price patterns to confirm the pattern.

Risk management: It is necessary to set a reasonable stop loss to limit losses if the model does not perform as expected. You should use risk management tools such as stop orders to automatically cut losses when prices fall.

Do not make transactions at the bottom of the cup: Do not make transactions at the bottom of the cup. Because many times the indicator is wrong, it can cause many types of risks to arise.

Refer to a clear source of financial reports: You have to pay attention and be careful when announcing financial reports. Because at this time the price can drop very sharply, so immediate improvement measures are needed.

Conclude

In the above article, Forex Trading has given investors some information about the Inverted cup and handle model. However, to use this model, you should set your own rules in trading. You should set a reasonable stop loss point, using a combination of many different types of indicator models. Hopefully after reading the above information, you can better understand the inverted cup model.