In the world of trading, including crypto digital asset trading, there is one term that has caught the attention of traders: the cup and handle pattern. Like a cup of coffee inviting you to sip, this pattern offers sweet potential for those who are able to read it carefully.

Why is this pattern so important? Imagine you are playing chess in the crypto market. The cup and handle pattern is like a powerful opening strategy, helping you predict the next move of your “opponent”—in t this case, the often unpredictable price movements of crypto.

However, just like the art of making the perfect coffee, understanding and utilizing this pattern requires a special skill. How do you identify it amidst a complicated chart? What strategies can be applied when you find it? And most importantly, how reliable is this pattern in the volatile trading arena?

In this review, we will dive into the mystery of the cup and handle pattern. We will discuss its definition, learn how to distinguish it from other patterns, and explore clever tricks to utilize it. So, prepare your coffee, and let’s begin this trading adventure!

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:

1. Find the maximum and minimum points of the Open-High-Low-Close (OHLC) chart and then determine the appropriate pattern from that data.
2. 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.

Volume

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.

Form

Finally, the shape of the cup or cups must also resemble the letter “U,” not “V.”

Tips and Strategies Cup and Handle Pattern

When this pattern is perfectly formed, the price will jump like a released spring, heading towards its new peak. This is the golden moment for you to take a position, either for short-term or medium-term trading, with an exit target around the next resistance level.

However, don’t rush! The right trading strategy is the key to your success. Let’s explore some important tips to make the most of this cup and handle pattern:

1. Targeting the Resistance Zone

Once you get a definite confirmation of the cup and handle pattern signal on the asset’s price chart, immediately identify the resistance level. Think of this level as a ‘roof’ that covers the upper area of ??the cup and handle.

The goal? So that you can recognize the critical moment when the price finally breaks through this resistance level, opening the way to new, untouched heights.

2. Discipline in ‘Limiting Losses’

Although this pattern is popular and quite accurate, don’t be careless! Be disciplined in placing stop-loss orders. Think of it as your safety net. Place the stop-loss point at the lowest level of the formed ‘handle’.

Why? If the price fails to break through the resistance even though the pattern has formed perfectly, this strategy can at least minimize your potential losses.

3. Avoid Greed

When the price level successfully passes the resistance test and is ready to launch to its new peak, you may feel relieved. However, this is not the time to be complacent!

Avoid the temptation of greed that can cloud your judgment. Make sure every step of your trading is measured with mature analysis. Remember, in the world of trading, the balance between courage and caution is key.

So, Trader Friends, stay alert, analyze carefully, and let this cup and handle pattern be your ally in gaining profits. Happy trading!

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.