The cup and handle pattern is one of the terms in the trading world that is important to know, including crypto digital asset trading.
That’s because this one pattern is a system or method that is widely used by traders to predict the direction of crypto price movements.
Well, in this review, we will explore what the cup and handle pattern is, starting from its definition, how to identify it, tips and strategies that can be done, and how reliable this pattern is. Come on!
What is Cup and Handle Pattern
Basically, the cup and handle pattern is a price chart pattern similar to a U-shaped cup, with a diagonal trend to the lower right side that is almost similar to the shape of a cup handle.
First put forward by William J O’Neil in his book, entitled “How to Make Money in Stocks”, in 1988 ago, this pattern is often considered a bullish signal indicating an upward trend in prices.
As usual, this pattern will be marked by a decline in asset prices for some time. Next, the price of the asset will consolidate and start rising again to form the image of a cup.
If it has gone up, the price of the asset will go down for a while and then rise again to form a handle image. Generally, the process of chart formation in the cup and handle pattern takes a span of 7-64 weeks.
With the last increase in price, usually this pattern will be understood as a signal of the continuation of the rising price trend or bullish continuation. However, sometimes this pattern will also give a bearish continuation signal, which occurs when the shape of the cup chart curves downwards. This condition is called the “reverser cup and handle pattern”.
The function of this pattern is to see opportunities to buy assets/open positions. Traders will usually place a stop buy order at a position slightly above the trend line in the cup handle pattern section. The goal is that they are not too late to open positions and miss the trend of rising prices.
How to Identify the Cup and Handle Pattern
At least two main methods can be used to identify price chart patterns algorithmically. The following is the review, as adapted from the Harvard University website:
- Find the maximum and minimum points of the Open-High-Low-Close (OHLC) chart and then determine the appropriate pattern from that data.
- Match a chart of market conditions with an existing template to identify a pattern.
Meanwhile, in terms of shape, four methods are used to identify this pattern, which is as follows.
Cup depth (cup)
Usually, the price decline that occurs in this pattern reaches 50%. The price reduction was not too big or significant. If that happens, it will be difficult for the price to rise again.
Location of the cup handle
The image of the handle or the handle/cup handle that is formed will usually be at the top of the cup / at least above, not in the middle / below the cup.
Supposedly, the trading volume in this one pattern should decrease in line with the price decrease and then strengthen again along with the price increase. In addition, the volume at the bottom of the cup will be relatively lower than the average volume.
Finally, the shape of the cup or cups must also resemble the letter “U,” not “V.”
Cup and Handle Pattern Tips and Strategies
Here are tips and trading strategies using this pattern that you need to know.
Wait until the handle is formed.
First, new traders open long positions when the cup handle pattern has been formed. The reason is that the formation of a cup handle at the top of the cup can signal that the asset price will rise again.
In addition, don’t forget to keep putting resistance lines, both on the cup and the handle image, with the aim that when a price increase signal such as a true breakout occurs, traders can make a buying decision quickly.
Set a stop loss at the lowest point of the handle
The stop loss function is a safety net against the worst possibility if the asset price will not go up and instead go down. Now, by placing a stop loss at the lowest point of the handle, the trader can minimize losses by selling the asset at a price commensurate with the purchase price.
Stop loss is one of the essential components that must be in every trading strategy to minimize unwanted losses.
Determine the right exit strategy
Often, the price chart does not produce a cup chart image with the same height between the left and right sides. Therefore, if a trader wants to use this pattern to take profits, he must be able to determine the correct take-profit strategy.
In addition, it is far from being greedy and using technical analysis to estimate the height of the right side of the cup will be the same as the left side or not and how to make a good profit.
How Reliable is Cup and Handle Patterns?
Although this pattern is a signal that is reliable enough to be used in trading, there are still several problems faced, including the following.
It takes a long time to form.
As explained earlier, this pattern will usually form from a curve running for 7 to 64 weeks (about two months to more than a year and a half).
In a sense, to make decisions regarding this pattern, traders and investors, of course, must wait a long time for the pattern to form. Of course, this long or long waiting time can be a factor for traders to lose the opportunity to get maximum profit.
Problem with shape
The next problem is that neither traders nor investors can ever tell how far the price of an asset has fallen until it hits bottom and consolidates.
In this case, it is not necessarily that shallow cup charts will not bring profits, or deep cup charts always mean that there will be profits.
It’s not uncommon for cup charts to form without handles.
This becomes another problem in the form of this one graphic pattern. As a result, traders hesitate to make decisions, and once they make a decision, it is too late.
Therefore, it is better to predict the formation of this one pattern while continuing to carry out other technical analyses, such as moving averages, RSI, and others.
Thus a review of the cup and handle pattern that you need to understand. See articles about crypto assets, blockchain, and others only at Indodax Academy.