Cup and handle crypto
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The cup and handle pattern can be found within a variety of time frames, from hourly, weekly to monthly charts. However, it is more powerful on daily chart time frames. There are a couple of variations of the pattern, but they all have a similar look. Characteristics of the Cup and Handle Pattern The cup and handle pattern appears after a big rally where the market needs to pause and catch its breath. The pattern consists of five key components, which then lead to a breakout higher.
Strong uptrend to set up the potential pattern Retracement of the previous rally Rebound rally back up near the previous high Drift sideways in pricing with a slant to the downside 5. Volume needs to increase on the rally of 3, but drift lower in 4 more on this later After a big uptrend in price 1 , the market begins to correct lower 2 , shaping the first half of the cup.
However, there are instances where a deeper correction may take hold. Once a bottom is formed, prices will begin to rally 3. At this point, the cup portion of the pattern has been created. Now that prices are near their old high, bullish traders stop buying and wait to see if a breakout takes place.
Traders who bought near the old high are thankful and nervous at the same time. They are thankful that prices have rebounded back to the old high, but nervous about another selloff. They are considered weak hands. Hence, selling the asset gradually, creating the handle 4. However, the total volume begins to decrease as the market is running out of sellers. The price trend is from sideways to slightly lower, and it carves the handle of the pattern. In the end, the pattern takes the shape of a coffee cup with a handle on the right side.
The pattern is confirmed when prices break above the high of the handle as the previous uptrend continues. The cup and handle pattern cannot exist without a prior uptrend. As a result, the pattern is found frequently within the crypto market. Types of Patterns There are a couple of variations to this pattern that crypto traders need to be aware of.
First, there are times when the handle portion of the pattern develops above the old high. These situations are considered to have a high handle. In the above example, we see a cup with a high handle. The handle forms above the old high, rather than below. The result of the pattern remains the same where it is a minor breakout higher, but then prices trade sideways on declining volume to form the handle.
The pattern is confirmed when the market breaks above the highest price of the handle. Now that charting software has made access to intraday charts easier, variations of this pattern have emerged such that it can be found within intraday chart time frames.
The intraday pattern operates similarly but concludes more quickly. In the Bitcoin example above, we are using a 4-hour chart. All of the necessary ingredients are present, including the volume spikes. During the retracement portion, you want to see increasing down in volume. On the rally portion of the cup, you want to see increasing volume. Then, during the formation of the handle, trading volume will ideally shrink as both buyers and sellers are shaken out.
The Bitcoin chart above also illustrates a high handle, which we discussed in the previous section. After the successful cup and handle portion of the chart, Bitcoin breaks out and accelerates higher. Inverted Cup and Handle Pattern The inverted cup is the reversal pattern indicating a momentum sell short signal signaling a bearish continuation pattern.
The chart patterns happen within a span of three to six months and volume plays a role in the completion of the pattern and the confirmation of the breakout from an uptrend. At the same time, the inverted cup top is formed when there are more sellers bidding for the price to go down.
When it happens, it indicates the end of the bull markets. The inverted handle pattern forms when the asset emerges out and begins to fall from the right side of an inverted cup. However, a true inverted handle happens when it fails to break down and finally meets the support level and attempts to break to a newer low.
To spot a true inverted cup and handle pattern, the shape needs to be obvious and the trend line needs to curve up and then down like an upside-down cup. When this reversal pattern happens, it tells you that it is not a good probability to trade if pullback or correction is not on the way.
As prices approach the old high, a failed breakout traps both recent buyers and buyers at the bottom of the base. Recent buyers see their small floating gain evaporate, and buyers at the bottom of the base fear a double top reversal. Both sets of buyers exit the market; as a result of this entrapment, these buyers are nervous and slowly sell out, creating the handle of the pattern.
The handle must form in less time than it takes to form the cup. If the handle pushes too low, then it will be ineffective at trapping short sellers. An effective handle will drift lower, rather than trend lower. This sows doubt among short-sellers, who become nervous about the failed trend to the downside. As a result, they close out their positions, which adds a little buying pressure to the market, popping the price a little.
Then, new buyers enter the market as they see the technical setup complete, pushing the market above prior highs. In this case, the minima formed by the figure create the level of support. In the event of a breakout and consolidation below the support line , the downward trend continues. How to trade the cup and handle?
The picture below shows a conditional example. The price moves in an upward trend, then at some stage there is resistance , there is a correction, then the price returns to the level where it meets resistance again, but with less force. As a result of the next approach there is a breakout of the resistance level and the continuation of the trend. There are several methods of trading this structure.
Some traders open their positions during the breakout of the resistance line, more conservative traders wait for confirmation of the breakout and open their positions after the level retest. According to the rules, stop loss is put immediately behind the handle, or at the breakout level , depending on your risk management. Take profit is set equal to the height of the cup. The rules for the figure of an inverted cup with a handle are absolutely identical.
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A cup and handle is considered a bullish signal extending an uptrend, and it is used to spot opportunities to go long. Technical traders using this indicator should place a stop buy order slightly above the upper trendline of the handle part of the pattern. The pattern was first described by William J. American technician William J. O'Neil included time frame measurements for each component, as well as a detailed description of the rounded lows that give the pattern its unique teacup appearance.
As a stock forming this pattern tests old highs, it is likely to incur selling pressure from investors who previously bought at those levels; selling pressure is likely to make price consolidate with a tendency toward a downtrend trend for a period of four days to four weeks, before advancing higher. A cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities.
It is worth considering the following when detecting cup and handle patterns: Length: Generally, cups with longer and more "U" shaped bottoms provide a stronger signal. Avoid cups with sharp "V" bottoms. Depth: Ideally, the cup should not be overly deep. Avoid handles that are overly deep also, as handles should form in the top half of the cup pattern.
Volume: Volume should decrease as prices decline and remain lower than average in the base of the bowl; it should then increase when the stock begins to make its move higher, back up to test the previous high. A retest of previous resistance is not required to touch or come within several ticks of the old high; however, the further the top of the handle is away from the highs, the more significant the breakout needs to be. How to Trade the Cup and Handle There are several ways to approach trading the cup and handle , but the most basic is to look for entering a long position.
The image below depicts a classic cup and handle formation. Place a stop buy order slightly above the upper trend line of the handle. Traders may experience excess slippage and enter a false breakout using an aggressive entry. There is a risk of missing the trade if the price continues to advance and does not pull back. For example, if the distance between the bottom of the cup and handle breakout level is 20 points, a profit target is placed 20 points above the pattern's handle.
The subsequent decline ended within two points of the initial public offering IPO price, far exceeding O'Neil's requirement for a shallow cup high in the prior trend. The subsequent recovery wave reached the prior high in , nearly 10 years after the first print. The stock broke out in October and added 90 points in the following five months. Specifically, with the cup and handle, certain limitations have been identified by practitioners.
The first is that it can take some time for the pattern to fully form, which can lead to late decisions. The cup rim resistance line should be roughly the same on both sides, with some room for deviation. The depth of the pattern should not be extremely deep, retaining a shallow, teacup like shape.
Decreasing trading volume is common throughout the pattern. Increasing volume helps confirm the pattern as valid if trading volume kicks in after the handle is formed and throughout the bullish breakout, causing strong continuation. A breakout above the resistance line following the handle signals that bullish continuation should follow, reaching the cup and handle target based on the measure rule.
The cup and handle pattern target can be found by taking a measurement from the base of the cup to the rim of the pattern, then applied to the breakout point of the cup which is also the breakout point of the handle. Cup And Handle Crypto Market Day Trading Example In the below example using the Litecoin intraday chart, we can see that the previous uptrend has begun to retrace, forming a sideways rounding trading range at the bottom of the cup.
Slowly, the downside starts to reverse and rebound back to the previous high. There is another pullback at the resistance trendline, creating the point of the handle on the right-hand side, which typically slopes downward. This resistance line acts as the breakout level at which the price target should ideally be projected from. The cup and handle pattern tells the market that although there was a pullback at resistance, buyers created a strong base of support to move up in the cup part of the pattern.
The rounding support level takes price back to resistance, where there is yet another pullback forming the handle. With only a shorter correction and support only further building, buyers become more confident and push prices through the resistance level. At the same time, because resistance has built up sell orders and short positions, when the pattern ultimately breaks upward and confirms, all of these orders are stopped out, which when combined with new buyers buying the breakout can lead to a fast move and powerful continuation for several bullish candles.
Understanding Risk And False Signals Like most chart patterns, cup and handle patterns are open to some interpretation. However, particularly steep or shallow cup and handle patterns can sometimes be false signals. V-bottoms must also be ignored.
Also a too high handle could be a sign that the pattern is invalid. Because the pattern is defined as taking weeks to a year to form, it might not be clear that the market is forming a cup and handle until much later in the pattern. Cup and handle patterns can also fail, even if they fit all important identification guidelines. Failed or busted patterns can lead to a sharp move in the opposite direction that was expected. As such, it is important to confirm cup and handle patterns with other technical indicators to increase the probability of success.
Margex offers up to x leverage and long and short positions on cryptocurrencies like Bitcoin, Ethereum, and Litecoin. Step 1 - Scan the price chart of the digital asset of your choosing. In the above example, Cardano formed a large cup and handle pattern across several weeks. The handle formed near the resistance line. The pattern was later confirmed and met the price objective based on the measure rule and depth of the cup.
Step 2 - Based on how the pattern should be traded, traders will want to wait for a high volume breakout of the resistance level. This is also called the top or rim of the cup. A buy order or long position can yield great results if the pattern is confirmed.
Step 3 - As part of a risk management strategy, set a stop-loss order below the lower trend line of the handle. If the pattern is invalidated and the market moves against you, you will have prevented a significant drawdown or large losses.
Step 4 - Using the target objective based on the measure rule, traders can get an idea of where to take profit. It is wise to measure and plan out these levels in advance. It helps traders stick to their trading strategy and follow a plan. FAQ This guide is designed so users takeaway tons of useful information.
To ensure that all possible areas are covered and there are no questions remaining, we have gathered this list of the most frequently asked questions about the cup and handle pattern. What is a cup and handle pattern? A cup and handle pattern is a chart formation that resembles a cup with a handle.
The pattern forms when price retraces its previous uptrend, and declines in a rounded, U-shape, forming the point of the cup. As price rises to resistance, another smaller pullback forms the handle. Once the resistance line is broken, a large continuation move should follow. Is a cup and handle pattern bullish? The cup and handle pattern is inherently bullish and is primarily a continuation pattern. The pattern also comes in an inverse version, where the cup and handle are upside down.
In both cases, the handle is on the right-hand side of the pattern. The inverted cup and handle pattern is a bearish continuation pattern. How do you scan for a cup and handle patterns? Scanning for the cup and handle pattern in crypto is easy using the free charting tools offered by Margex.
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