Price patterns are one of the important topics in technical analysis, which unfortunately are sometimes not recognized correctly due to lack of skills. Many people think that technical analysis is only about finding price patterns in the price chart, whereas these patterns are signs through which you can predict the future of the trend and accordingly, make your trades optimally. . As you know, price patterns are divided into two categories: continuation and reversal patterns. If continuation patterns are formed, the previous trend of the chart is expected to continue; But if we see a reversal pattern in the price chart, the possibility of changing the trend will be very high. The cup and handle pattern is one of the continuation patterns, named because of its similarity with the cup. This pattern is also called cup pattern.

What is the cup and handle pattern?

The cup and handle pattern is a continuation pattern that is formed only in uptrends and will indicate the continuation of the uptrend. The appearance of this pattern is in the form of a cup body and its handle. A part of the pattern that is U-shaped and indicates a sharp drop in price; It forms the cup and the part that shows the concentration of the price below the created resistance level; It is a cup handle.

Please note that the cup and handle pattern is usually used for long-term market analysis. The minimum period of time to form a cup pattern is 7 weeks and the maximum is 65 weeks.

How to form the body of the cup

Suppose that the price chart of an asset is in an uptrend. After some time, due to supply pressure, the trend changes and the price chart enters a downward trend and usually drops to a third of the initial price; But the strength of the sellers is not enough for the price chart to enter a sharp downward trend. In this way, the share comes to rest and the surface under the cup is formed. Then the buyers take the power and pull the price chart out of the downward trend; Therefore, the downward trend does not last long and the price chart returns to its upward trend. This flow continues until the downward trend of the graph is compensated to a large extent. Following these interactions, the body of the cup and handle pattern is formed. This body is almost similar to the English letter U.

How to form a cup handle

After forming the body of the cup, it is time to handle it. In the cup and handle pattern, the handle plays a more important role; Because the last stage of pattern stabilization is the formation of the category. As we said, after compensating the downward trend of the chart, the body of the cup is complete and after that we see a resistance at the previous price level (left edge of the cup); Therefore, a downward trend will begin again, with the difference that this time the downward trend will be short-term and it will usually be more dense than the previous downward trend. Therefore, it returns to the upward trend at a faster rate. With the beginning of the upward trend, the cup group is gradually formed by breaking the previous resistance. After the cup and handle pattern is formed, the chart is expected to continue its upward trend.

What does the cup and handle pattern represent?

The cup and handle pattern is a positive signal to buy. This pattern shows the superiority of buyers over sellers and prevents the downward trend of the market. According to the diagram of this pattern, you can see that after the formation of the cup body, the number of bearish candles is greatly reduced and the positive candles are strengthened. In terms of market psychology, this issue indicates the signal of the rapid rise of the market; Therefore, after seeing the cup and handle pattern, you should be ready to buy.

Important parameters in cup and handle pattern recognition

It is very important to check the following parameters to identify the cup and handle pattern:

cup length (pattern formation time)

Patterns with long cups and rounded bottoms are more reliable than those with sharp, V-shaped bottoms. In fact, the formation of the cup in this pattern took more time and increased the validity of the pattern.

Cup depth

The depth or height of the cup should be a reasonable amount. If the pattern is deep, it cannot be used as a valid pattern. You should also avoid trusting patterns that have deep handles. The maximum depth of the handle should extend to the upper half of the cup.

The distance between the handle and the previous resistance

As we said, after forming the body of the cup, it is time to form the handle. The smaller the distance between the starting point of the handle and the previous resistance (the left edge of the cup), the more valid the pattern is. The most important part of this pattern is creating a break in the handle area. The greater the distance between the handle and the previous resistance, the stronger this failure should be.

Turnover

The volume of transactions in the body of the cup is such that in the first downward trend that is formed on the left side of the cup, the volume of transactions has a decreasing trend. After the end of the downward trend and the formation of the bottom of the pattern, the volumes remain constant. Finally, with the beginning of the upward trend and the formation of the right side of the cup, the volume of transactions will increase.

This process is also important for the cup handle. With the beginning of the downward trend and the formation of the left side of the group, the volumes decreased and after the end of this downward trend and the formation of the right side of the group, we will see an increase in the volume of transactions. The volume of transactions at the breaking point also increases sharply.

nt points about the cup and handle pattern

To apply any price pattern, there are a series of important points that the analyst needs to pay attention to. An analyst can reach the desired result when he is fully familiar with these points. In this regard, we mention some important points about the cup and handle pattern:

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  The effect of buyers’ power on the formation of the handle and cup pattern

The high power of buyers is one of the most important points that should be taken into account in relation to the cup pattern. In fact, it is the power of buyers that prevents heavy downtrends. Usually, with the formation of the cup body in this pattern, the number of bearish candles will decrease and the weakening of these candles will be revealed in the chart. High strength of buyers is a strong signal to predict the formation of cup and handle pattern.

• Determining the right time to enter with the help of the cup and handle pattern

Usually, the question is raised about every price pattern, how to identify the best point to enter or exit the share? Regarding the cup and handle pattern, many analysts believe that the best point to enter is when the cup body is fully formed and the cup handle is half formed. Of course, some also believe that it is better to wait until the cups are fully formed before entering. The view of the second group is somewhat cautious, and on the other hand, it should be noted that the opportunity to enter the share and earn profit may have been lost by then. However, each trader can decide to choose the appropriate entry point based on their trading strategy and risk tolerance.

• The importance of the right timeframe to recognize the cup and handle pattern

Price patterns in technical analysis can be long-term or short-term. The handle and cup pattern is one of the long-term patterns that the longer the pattern formation time, the more valid it will be. This usual pattern is formed in the period of 1 month to 1 year; But in some cases, it took about 5 years to form this model. Therefore, you must consider the appropriate timeframe for each pattern.

• Signs to recognize a strong cup and handle pattern

Each price pattern emits different signals based on its components. A skilled analyst should consider the different aspects of each pattern to determine the strength of the signal being issued. In this regard, regarding the cup and handle pattern, the following can be mentioned:

• The rounder the bottom of the cup, the stronger the signal.
• If the bottom of the cup is sharp, it is better to avoid entering the share.
• If the depth of the cup is too shallow or too deep, the emitted signal will be weaker.
• In order to form a powerful model; In the downward trends of the formation of the pattern, the volume of transactions should be increasing and in its upward trends, the volume of transactions should be decreasing.
• The more liquid the market is, the more valid the pattern will be.

• Using other analytical tools in addition to the cup and handle pattern

Some analysts trade only based on observing price patterns. This mistake makes them go astray without considering other aspects of the market. Even if the price patterns are formed completely and with all the mentioned signs, they cannot be considered alone for making decisions in trading. Please note that the use of other analytical tools such as indicators, fundamental analysis, etc., along with recognizing patterns, can help you buy and sell more confidently. If other tools confirm the price patterns, you can decide on the final result.

Determining profit limit and loss limit in cup and handle pattern

To determine the profit limit in a cup and handle pattern, simply measure the depth of the cup and move up from the handle break point by the same amount. The resulting point is the profit margin or target price.

In the cup and handle pattern, the loss limit is usually considered a little lower than the cup handle.

What is the inverted cup and handle pattern?

The reverse cup and handle pattern is a continuation pattern that consists of two parts, the cup and its handle. This pattern is usually formed in downward trends and in terms of appearance, it is the reverse of the cup and handle pattern.

How to form an inverted cup and handle pattern

When the price is at its bottom, buying pressure by buyers will increase the price and move it away from the support line. The upward trend of the share continues until the new resistance. Then buyers recognize profit and start selling. This causes a downward trend in the price. This downtrend continues to the previous support line or close to it. In this way, the body of the cup is formed. As the price decreases, buyers start buying again and create an uptrend that is shorter than the previous uptrend. But when the price reaches the proximity of the previous resistance, the downward trend is created again. During this process, the handle of the cup is also formed. With the breaking of the support line, the pattern is completed and the previous trend continues.

Determining profit limit and loss limit in reverse cup and handle pattern

To determine the profit limit in an inverted cup pattern, simply measure the depth of the cup and move down the same amount from the breakout point of the handle. Please note that this issue is used in two-way markets where it is possible to make a profit from the price reduction.

Usually, the loss limit in the reverse cup pattern is considered a little higher than the cup handle.

How to distinguish whether the cup and handle pattern is bullish or bearish?

Considering that the cup and handle pattern is a continuing pattern; By examining the trend before and after the formation of the pattern, you can find out whether the pattern is ascending or descending. As we said, the cup and handle pattern is usually formed in uptrends and the inverted cup and handle pattern is usually formed in downtrends. Therefore, if the trend is bullish before the formation of the pattern, we have a bullish pattern. Also, if the trend before the formation of the pattern is bearish, our cup and handle pattern will be bearish.

Frequently Asked Questions

Is the cup and handle pattern a reversion or continuation pattern?

The cup and handle pattern is a continuation pattern that, once formed, is expected to continue the previous trend of the chart.

In which process is the cup and handle pattern formed?

Usually, the cup and handle pattern is formed in upward trends and its reverse pattern is formed in downward trends.

In what time frame is the cup and handle pattern formed?

This pattern is usually formed within a period of one month to one year, but sometimes it took up to 5 years to form.

What signals does the cup and handle pattern give to traders?

Given that the cup and handle pattern is a continuation pattern and forms in uptrends, it issues a buy signal.

How is the loss limit determined in the cup and handle pattern?

Usually, the loss limit in this pattern is set a little lower than the cup handle.

Conclusion

In this article, we talked about the continuing pattern of cup and handle as one of the important patterns in technical analysis. We have also told you some tips that are essential to recognize the cup and handle pattern and measure its signal strength. The cup and handle pattern is a long-term pattern, so it is not useful for short-term fluctuations. You can use it for your long-term trades by recognizing this pattern and if a strong signal is issued based on the criteria mentioned in this article.