Cup and Handle or Saucer and Handle pattern is one of the strongest patterns I have ever seen. This pattern doesn’t forms on the charts too often, because unlike the other patterns like triangles, head and shoulders, rectangles and… it takes a long time to form. However, when formed it is so reliable and strong and generates strong and profitable trade setups.
This patterns looks exactly as it is named. It looks like a cup and its handle when you look at it from the side:
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How Does the Cup and Handle Pattern Form?
Please refer to the below screenshot while reading this:
1. A to B: Cup and handle pattern starts forming when the market starts going down strongly. The down movement forms the left side of the cup.
2. B to C: After a while of having a strong bearish market, bears becomes exhausted and so the down movement becomes slower, and we will have a sideways market for a short period of time. This sideways movement forms the bottom of the cup.
3. C to D: Then the bulls take the control and the market starts going up strongly, like when it started going down strongly at the beginning of the formation of the cup. This strong up movement forms the right side of the cup.
4. D to E: After a while of going up, the bulls become exhausted too, and so the market stops going up strongly and forms a small sideways section which is the cup’s handle. This part is very important because it is where we can predict the next direction of the market. I will tell you how.
How Can You Use the Cup and Handle Pattern in Your Trading?
This is a good question. We learn the chart patterns to become able to use them for locating the trade setups, otherwise there is no point to learn to recognize the chart patterns.
1. Going Long at the Bottom of Cup and Handle Pattern:
When the markets starts going down strongly and then becomes slow and forms a sideways market that has a tendency to go up, experienced traders understand that the market is at the middle of forming a Cup and Handle pattern.
When the market is going down strongly to form the left side of the pattern, you cannot do anything unless you are already short because you had the chance to take a short position after a support breakout. However, you have to wait if you are not already short. If the market becomes sideways and shows a tendency to go up by forming bigger and bigger bullish candles, then you know that the market is at the middle of forming a Cup and Handle pattern. At this stage, the left side of the cup and also most part of its bottom part is already formed, and you know that soon you will see a strong up movement which will form the right side of the cup. Therefore, you can wait for a resistance breakout to go long.
I am using the above example (screenshot) to show you how and where you could go long when the market was completing the formation of the bottom of the cup:
2. Going Long/Short After the Handle Breakout:
There is a well-known rule about the handle which says, if the price breaks above the handle resistance, it will keep on going up strongly. This up movement can be at least the same as the size of the cup depth.
If you succeed to go long at the bottom of the cup, then you should close your position and collect your profit when you see that the market becomes slow again and bigger bearish candlesticks start appearing. This is the beginning of the formation of the handle (D to E).
You wait for the handle to develop. It will have a resistance and probably a support. Sometimes the handle forms inside a triangle which makes it much easier to wait for the trade setup.
In the above example, the price didn’t break above the handle resistance. Instead, it broke below a support line that formed after the handle formation and went down strongly. Therefore, we could go short. If it had broken above the handle resistance, then we could have gone long:
Now I show you an example where the price breaks above the handle resistance and goes up strongly. This is something that is more expected when a Cup and Handle forms on the chart. In most cases bulls will take the control after the formation of the handle and the price will go up after the handle resistance breakout.
The blow screenshot shows another cup and handle pattern that formed on EUR/USD daily chart after the above Cup and Handle that I already showed you. The above pattern broke below the support and went down. However, the below pattern broke above the handle resistance and went up. Another thing about the below example is that the handle formed inside a symmetrical triangle that made it easier to wait for the breakout, because we already knew that in an uptrend it was more probable that the market breaks above the resistance of the formed symmetrical triangle (which in this case is the handle resistance also) and continues the uptrend:
How Far the Market Would Go After the Handle Resistance Breakout
To answer this question, you have to plot a horizontal line above the handle highest level. The distance of this line from the bottom of the cup is the size of the up movement that will occur after the handle resistance breakout.
Please look at the below screenshot. I have plotted a horizontal line above the handle highest high (the dashed red line). Then another horizontal line below the lowest low of the cup. The distance of these two lines is 914 pips. If we had taken a long position after the handle resistance breakout, we expected that the market would go up for 914 pips. To prove if it would or not, I plotted another horizontal line 914 pips above the horizontal line I plotted above the handle’s highest high. As you see on the below screenshot, the market did went up exactly for 914 pips and then reversed and went down. It is amazing, isn’t it?
There are some other ways to determine the breakout movement, like using the Fibonacci levels. But I do not want to make this article too complicated by using Fibonacci. We will talk about Fibonacci in some other articles.
Inverted Cup and Handle Pattern:
Inverted Cup and Handle is as common as the regular one. It looks exactly the same, but it is only inverted. In Inverted Cup and Handle, we wait for support breakout to go short.
The below Inverted Cup and Handle could give us several opportunities to go short:
This screenshot shows the same Inverted Cup and Handle pattern, but with a smaller magnification. As you see, with this one also the market went down after the support breakout very strongly:
As you see, Cup and Handle pattern is such a strong pattern. Although it doesn’t form on the charts very frequently, it works strongly and its breakouts are reliable and profitable.
Keep in your mind that you should not let your mind form a pattern when there is no pattern on the chart. Do not see the patterns that don’t exist on the charts. Wait for the patterns to form completely and then decide about taking positions.
Forming a Strong Cup and Handle Pattern on USD/CHF Monthly Chart
USD/CHF has already formed half of a Cup and Handle pattern on the monthly chart so far. It means the A-B and B-C parts are already formed. Still we don’t know whether it will form the second half to complete the Cup or not. However, if it breaks above the 1.03269 resistance level on the monthly chart, then most probably it will go up to form the second half: