Chart Patterns - Cup With Handle
Type: Continuation Pattern
Appearance: Looks like the cross section of a tea cup with small handle on the right side of the cup.
Typical Duration: 7 to 65 weeks (handle duration must be at least 1-2 weeks and can get to be quite long)
Description: The cup with handle formation seems pretty common at first glance, but once we apply certain filtering criteria in order to get an acceptable trade success rate, the actual number of "true" cup with handle patterns drops off considerably. As a result, many of the implied relationships have little statistical significance, so use them at your discretion. For the sake of simplicity, we assume here that the pattern is forming in an uptrend. The inverse is true for down trends.
- The cup must be U-shaped (not V-shaped) and it must have a handle. Cups without handles are a different chart pattern known as "rounded bottoms";
- In order to be considered valid, the cup with handle must be preceeded by a 30% rise or more, which is somewhat rare in forex;
- It should also be noted that the the handle should not dip below the cup mid-point. If it does, the pattern is invalidated;
- Shorter handles (timewise) tend to produce higher gains, though as mentioned, the sample size is too small to verify this result statistically;
- Cups with higher right lips perform better than cups with higher left lips or equal lip heights. This result is statistically significant;
- The most likely gain is approximately 15% after a breakout;
- It normally takes about 6 months for the formation to reach the ultimate high;
- Throwbacks (false breakouts before price action ulimately reaches target) are very common, and happen in almost 75% of cases studied. Throwbacks take approximately 2 weeks to complete, and never more than 30 days. This is a very important fact and will be discussed further in "How to Trade It" below;
Strengths: Can be a high probability trade if all the above criteria are applied correctly to the formation, particularly the lip heights, as that is the most statistically sound criterion. The probability of throwback is so high that it can actually be used to our advantage. Please see the "How to Trade It" section below.
Weaknesses: A nicely set up cup with handle pattern is difficult to find in forex, since the requirements are quite stringent. The average gain after breakout is fairly small, meaning reward:risk ratios have to be closely scrutinized before a trade is based on this chart pattern.
How to Trade It:
- Measure the move - Calculate the height of the formation in pips by subtracting the low at the cup bottom from the high at the lip (preferably the right lip). Divide this difference by 2 in order to get the half-height of the cup. Add this result to the high at the right lip where the breakout occurs and the resulting number will be our target. Some traders prefer to use the full height as the target, but this results in a significantly reduced success probability.
- Enter after throwback - Since we saw earlier that throwbacks are so common, we can use that to our advantage (generally in trading, when something happens consistently more than 50% of the time, it is non-random and therefore exploitable). So, after the initial breakout, wait for price to drop below the breakout level once again before buying. This will significantly improve the expectancy of our trade.
- Set stop loss order - slightly below the handle bottom is a good place, so shallow handles clearly improve reward:risk ratios.
- Use trailing stops - A significant number of cup with handle patterns fail after a 10-15% move, so it may be a good idea to set a trailing stop at this point (unless this is your target area anyway). Server-side trailing stops are far superior in longer-term trading because they don't require the trading platform to be open. You can check our broker reviews section to find a broker that offers this feature.
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