You know how constellations are named after the shape they resemble, and more importantly how they rarely even resemble the shape they are named after!
Well, the same is true with technical indicators. And perhaps never more true than with the case of the cup and handle chart pattern. This technical indicator is named so because of the U shape that is considered to be the main part of the cup and a rather straight but short line that plays the part of the cup handle.
Shape aside, in this article we want to fully discuss cup and handle technical indicators and see what it can bring for your trading experience.
Delving Deeper in the Cup and Handle Pattern
The cup and handle pattern is among the technical indicators that are used to signal a bull trend. The trading volume throughout this pattern is much higher with the main part of the cup itself than with the handle, which does not experience an increased trading volume.
There are some technical indicators that take a very short time to form. But the cup and handle pattern can take a bit longer. Although it is a time span during which this pattern forms into its eventual shape. It can take anywhere between 7 weeks to even much longer, in fact upwards of 60 weeks.
So let’s wrap up what we know about this pattern. The cup and handle has a larger part that is in the shape of a U and then a shorter straight line which is the handle of the shape. It is used to signal the coming of a bull market. Therefore, the main purpose of this technical indicator is to find the exact opportunities to take a long position.
So now let’s take a look at the precise information that this indicator provides for forex traders.
What Information Is Provided by the Cup and Handle Pattern?
Many of the technical indicators that we use on a daily basis in the forex market and in other financial markets have been established and created by individuals – financial, market experts and economists. The cup and handle pattern is no exception. This technical indicator was first introduced by the well-known American businessman William J. O’Neil in 1988.
The way this pattern works and provides data is actually quite reasonable in terms of market and trade sentiment. The beginning of the pattern is when the first part of the cup is formed. That is when prices high some highs in order to test the old resistance levels. As the prices hit these highs, traders are enticed into selling. This is what is known as a selling pressure.
When traders are pressured into selling because they think prices are at their highest, this causes prices to fall. When prices fall further the cup begins to take form.
But when it gets a bit lower, that is when we see a rekindling in prices and they start to pick up again and get higher, which eventually forms that whole U shape.
After that we see prices plateau for a bit for things to settle and basically for the new support to form. Finally, after all of this we can expect a bullish trend in the making.
How to Detect a Cup and Handle Pattern?
As with any other technical indicators, there are certain telltale signs that can help you detect and confirm the formation of a pattern. In the case of the cup and handle pattern, there are also some factors to keep in mind.
First the main part of the cup itself. The U shape of the cup is the most important part. So the longer the bottom part is, the more powerful it is. It is an important and significant sign that the cup and handle pattern is in fact being formed.
Now make sure the shape of the bottom of the cup does indeed form a U. which means it needs to be a soft edge at the bottom. If there is a sharp edge, it would naturally form a V shape rather than a U shape.
On the other hand, the handle of the cup should be near the top of the latter part of the U shape. If it is too low, then that is not a pattern you want to rely on. The handle of the cup should be near the top half of the cup.
The last sign that you need to look out for, as is the case with almost every single technical indicator, is the trading volume. In some cases, trading volume does not go with the flow of the pattern in question. But in the case of the cup and handle pattern, the trading volume plays in the same tune as the indicator itself.
This means trading volume is high at the beginning of the formation of the cup. Then it should decline as the first part of the cup goes deep to form the bottom of the U shape. So it should be lowest throughout the pattern at the bottom of the shape. But then as the prices recover and move upwards, the trading volume should also recover and increase along with the prices.
This can also be a good indicator that the cup and handle pattern is indeed forming correctly and that you can depend on the coming of the bullish trend after the pattern.
Trading with the Cup and Handle Pattern
With every single technical indicator, there is not just one way to start trading. Depending on your goals there might be several different ways in which an indicator can be used for trading. But as far as the cup and handle is concerned, the most basic route to go down is to try and find the best place to enter into a long position.
The best place to enter into a long position is to wait until the handle of the cup has formed and the upper trend line of the handle has formed.
The cup and handle chart pattern is among the most dependable technical indicators when it comes to bullish trends. In fact, when the formation begins to take shape, you can rest assured that after a couple of months and depending on the specifics of the market, a bullish trend is on its way. So next time you are trying to analyze any chart in the forex market or any other financial market, keep an eye out for the beginnings of the cup forming into a U shape.