The cup and handle pattern is one of the phenomena that can appear in trading . Although this pattern rarely appears, you need to pay close attention to it if one day it appears. As the name suggests, this pattern will form a cup with a handle at the end.
This unique pattern does not just appear out of nowhere. There is a meaning in it. Traders should know very well what might happen. Many opinions say that this pattern gives a good sign. However, is that really so?
Get to know the Cup and Handle Pattern
This pattern of cups with handles is not a phenomenon that appears once or twice. This cup and handle pattern has been put forward by a trader and book author, William J. O’niel in 1988. A more complete explanation can be seen in his book How to Make Money in Stock .
The emergence of the cup and handle pattern is indicated by the value of an asset that has fallen for some time. Then, the price rises again so that it forms a picture like a cup. After that, the price went back down to form the image of a handle.
The process of forming this cup and handle pattern can take anywhere from 7 to 64 weeks. The next trend that will appear tends to be very sharp bullish . This can be a sign for traders to prepare for new trends.
Reverse Cup and Handle Pattern
This pattern can also appear upside down or is often called the reverse cup and handle pattern . Basically, the shape that will appear in the graph is like a cup. The difference is, the cup hole is facing downwards.
The marks that appear in this pattern will be the exact opposite of the regular ball. The price will drop at a certain point, then rise to form a cup. After that, it will go down to a certain point and come back up to make the handle.
This upside-down cup and handle pattern will signal the subsequent bearish trend. However, you still need to make sure the shape of the pattern before taking a step. The pattern that has been formed may not indicate a bearish trend if there are other factors that influence it.
Identify the Cup and Handle Pattern
You must pay close attention to the pattern of asset values that are formed. Of course there are many factors that influence it. Here’s how to identify the cup and handle pattern .
1. Cup depth
Cup is an important factor in reading this pattern. The depth of the cup formed by the graph of course should not be too low. This depth will form from a pattern of falling and rising asset prices again.
Supposedly, the decline in prices that occurred no more than 50 percent. If it is larger, the value of the asset will be more difficult to return to the initial price. This could invalidate the cup and handle pattern .
2. Cup shape
In addition to depth, the shape of the cup must also be considered. The cup pattern that appears must be in the shape of a U, not a V. The letter U that appears is the result of a long consolidation of the current trend. That is, not down and then up quickly.
Some argue that longer cup images tend to have a stronger signal. This means that you need to start guarding against changing trends.
The trading volume in this emerging pattern should follow the price. When it goes down, the trading volume must go down and vice versa. In addition, the volume at the bottom of the cup will also be lower than average.
4. Place the handle
The handle pattern emerges from a drop in price that occurs after an increase. The popping handle should be on top of the cup, at least appearing in the upper third of the cup. the handle does not emerge from the center or bottom of the cup.
Disadvantages of Cup and Handle Pattern
All technical analysis has its limitations. The cup and handle patterns are also not free from these limitations. Many other factors are needed than just the patterns that are formed.
First, you need a long time to do the analysis. As already mentioned, the formation of this pattern can take up to 64 weeks. Even after waiting that long, it’s not necessarily the expected trend that will actually emerge.
In addition, the problem of the pattern that appears also needs to be re-identified. You have to make sure the pattern that appears is really cup-shaped.
The depth of the cup also needs to be considered. Wrong, you will only get a false signal. Worse yet, you’ve done a large amount of buying action.
Strategy Using Cup and Handle Pattern
The cup and handle pattern can be used by anyone, even beginners. However, you must know the right time to start using it. Here are tips for using the cup and handle pattern .
1. Enter when the handle pattern is formed
This pattern can help you to make a profit. However, you must know the right time to buy and sell it. The more precise, the more benefits you get.
The best time to start buying assets is when the handle is forming. For that, you need to pay attention to the cup pattern first while collecting capital. When the handle is formed, you can buy it right away.
2. Set stop-loss
The cup and handle pattern will predict the trend to 100 percent accuracy. There is still a possibility that this theory you already know may be wrong. Instead of rising after the handle is formed, the value of the asset may fall further.
Therefore, you should always prepare a backup plan by setting a stop-loss . Stop-loss is selling an asset that is owned when it is experiencing a downward trend in order to reduce the risk of loss. You should also know when to apply this strategy.
The handle will pop from the top point to the bottom of the cup. When the trend does not go up, try to make a stop loss immediately. Determine to sell the asset when it reaches its buy point. If it can’t be an exact match, at least avoid very low values.
3. Determine the time to sell all assets
The target in trading is to profit from the buy and sell prices. You have to know the exact amount you want to achieve. It is possible that the value of the asset will soar after the handle is formed. However, has it lived up to expectations?
If so, do a sell activation to immediately realize the profit. If you haven’t, you have to determine when to delay the sale. This is a question for day-to-day traders .
There’s nothing wrong with selling even if you only get a small profit. After all, you can allocate it to other assets that provide patterns for an increasing trend. In essence, avoid greed to get bigger.
That’s the ins and outs you need to know about the cup and handle pattern . Continue to increase your knowledge about reading stock, forex and crypto charts when trading .