The cup and handle pattern is a market favourite when it comes to trading patterns. Learn how to trade forex and stocks with the cup and handle pattern.
The cup and handle pattern is slightly more complex as opposed to other chart patterns which can be tricky for some traders to identify. The steps below outline a simple guide to identify the cup and handle chart pattern successfully:The cup should form more of a ‘U’ shape as opposed to a ‘V’ with the high points on either side of the cup being approximately even.
The breakout signal can occur in different ways depending on the trader’s preference. Some trader’s look at thelevel taken from the horizontal between the highs of the cup. Once this breaks that level, entry will be confirmed. Other traders use a break of the handle trendline as a long entry point.Trading with the cup and handle pattern differs slightly when using it to trade forex and equities. The volume function is often used in stock trading as a spike in volume indicates the breakout which confirms the entry signal. Forex trading does not normally use this function, and instead involves other more conventional breakout confirmation methods such as breaks above resistance. The rest of the process is the same when trading the cup and handle pattern.The image above is a monthly chart of the popular hotel and casino company Wynn Resorts Ltd. The chart exhibits a cup and handle formation with a clear prior uptrend as marked by the trendline showing higher highs and higher lows. A moving average may also be used instead to confirm the uptrend. The chart shows two potential entry points denoted by the green arrows. The first entry takes place on the breakout above the upper end of the price channel akin to a bullish flag with a spike in volume as verification of the move up. The second entry uses the resistance level between the highs on either side of the cup as a key price level. Once this is broken, traders can look to go long. This method is less aggressive, but the patience of additional confirmation can shield against a false breakout with regards to the handle channel.are often taken from the low of the handle. This can then be projected by a factor of two to arrive at a take profit with a ratio of 1:2This chart is unique in that the resistance line between the highs on either side of the cup and the handle price channel coincide. This gives the trader one entry point as a break above these two resistance points will be the same. The stop and limit points will be determined in the same manner as mentioned in the stock example. The only difference on this forex chart is the absence of the volume tool.The cup and handle can be used for both stock and forex marketsDefines clear stop, entry and limit levelsLeveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances. Forex trading involves risk. Losses can exceed deposits. We recommend that you seek independent advice and ensure you fully understand the risks involved before trading. Information presented by DailyFX Limited should be construed as market commentary, merely observing economical, political and market conditions. This information is made available for informational purposes only. It is not a solicitation or a recommendation to trade derivatives contracts or securities and should not be construed or interpreted as financial advice. Any examples given are provided for illustrative purposes only and no representation is being made that any person will, or is likely to, achieve profits or losses similar to those examples. DailyFX Limited is not responsible for any trading decisions taken by persons not intended to view this material.Content on this site is not a solicitation to trade or open an account with any US-based brokerage or trading firm
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