Forex trading is all about making an educated guess on future currency prices. Chart patterns, technical indicators and technical tools help traders plan their trades better. Technical traders are actively using chart patterns such as Cup and Handle in their analysis. What is Cup and Handle and how to use it in our trading? We’re going to discuss this in more detail.
Cup and Handle definition
Cup and Handle is a chart pattern widely used in technical analysis. The pattern signals upcoming bullish runs. The name comes from its shape. As it forms a cup in the shape of a letter U, followed by a handle, which is slightly tilted to the right. The more it resembles the letter U the stronger the signal.
Why is Cup and Handle important for traders?
- It is a relatively accurate indicator and produces strong signals for going long.
- Cup and Handle has been used for more than 30 years, which makes it a well-tested chart pattern.
- The pattern is easy to spot and easy to trade.
- Understanding Cup and Handle in trading can help traders predict bullish runs.
- Cup and Handle offers a good risk to reward ratio.
Thorough Cup and Handle Explanation
Cup and Handle explanation was published by William J O’Neil in 1988. This chart pattern indicates an upcoming bullish run, with relatively good accuracy. The first part of the pattern is a cup that looks like the letter U, and it’s followed by the handle, which is slightly tilted towards the right. This pattern takes time to form and generally fails to work in low timeframes due to increased noise. In general, patterns work better in larger time frames.
When the Cup and Handle pattern is forming, its accuracy can be easily determined by how rounded the cup looks. Keep in mind that if the body shape looks less like the letter U and more like the letter V, it’s not a Cup and Handle pattern.
The pattern offers a great risk to reward ratio. Once the handle’s resistance line is broken, traders can open long positions. Stop loss can be placed below the handle’s resistance or support trendline. The profit target is not specified and depends on the strength of a new trend. It is generally expected the price to move upwards by at least the same extent as the size of the cup measured from top to bottom.
Example of Cup and Handle in Forex
To better understand what Cup and Handle means, let’s have a look at a Cup and Handle example in Forex trading. Let’s say that USD/CAD is trading at around 1.25000 before going on a downfall where prices go down not too slow and not too fast, forming a slope before reaching a price around 1.21000. As you can see from the example, the pattern takes time to form. It represents gathering forces for starting a bull trend. Once the trendline in blue is broken, we can enter the trade and place Stop Loss order below the group of candlesticks gathered around the handle. The pattern offers a good risk to reward ratio, which is why understanding Cup and Handle in trading is important.
FAQs on Cup and Handle in Forex
Is the Cup and Handle pattern bullish?
Yes, Cup and Handle chart pattern is a bullish pattern that requires time to form. The pattern offers a great risk to reward ratio and is widely used by both professional and novice traders.
What to do when Cup and Handle pattern forms?
When the pattern forms, you can either wait for the entry signal and trade it, or avoid placing an order. It all depends on your trading style. Keep in mind that the pattern is only available for trading once its fully formed and entry should be made the moment price breaks handle resistance. Stop loss target depends on the situation.