Tag: Cup and Handle

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Forex Basic Strategies

Pairing Significant S&R Levels With RSI Indicator To Generate Accurate Trading Signals

Introduction

Introduction

Introduction

In the previous set of articles, we discussed strategies based on trend continuation or trend reversal. Let us change the subject a little bit and discuss a strategy based on ‘Support and Resistance.’ Although we all know how to trade support and resistance, there is always a problem of consistency when it comes to trading using the conventional support and resistance strategy. We have a look into some of these issues by designing a strategy that provides not only decent risk-to-reward (RR) but also a high probability of success.

Markets are continually changing due to changes in market participants, global politics, and economic events. This means if we continue to trade the usual way, we could be in trouble. It is necessary that, along with markets, we, too, change our trading strategy in order to adapt to the changing market environment.

Time Frame

The strategy works well on the 1-hour, 4-hour, and ‘Daily’ time frame. Therefore, the strategy is suitable for the swing to long-term traders.

Indicators

We make use of only one technical indicator in the strategy, and that is the Relative Strength Index (RSI) with its default settings.

Currency Pairs

The strategy is suitable for trading almost all currency pairs listed on the broker’s platform. One thing we need to ensure before choosing a currency pair is that it should be volatile.

Strategy Concept

‘Cup and Handle’ is a powerful candlestick pattern that shows the prevalence of bullish strength in the market. It is a very reliable pattern that offers excellent trading opportunities. ‘Cup’ formation indicates that the price was unable to make a proper ‘lower low’ on the higher time frame due to a strong buyer who took the price up. The ‘handle’ indicates that the market was unable to reach the previous ‘low’ due to weak sellers where eventually buyers bought at a higher price and are in the process of making a new ‘higher high.’

The logic behind the formation of the ‘Cup and Handle’ pattern makes it one of the most powerful patterns. But the pattern alone is not the basis for the strategy; we also use the RSI to take the highest probability trades. We apply the concept of ‘Cup and Handle’ pattern and RSI indicator at a long-term ‘Support’ level to execute low-risk ‘long’ trades.

The same concept applies when taking ‘short’ trades at long-term ‘Resistance’ level. Here we should look for the formation of the ‘Inverse Cup and Handle’ pattern at ‘Resistance.’ ‘Cup’ here indicates that the price was unable to make a proper ‘higher high’ on the higher time frame due to strong seller who crashed the price. The ‘handle’ indicates that the market was unable to reach the previous ‘high’ due to weak buyers where eventually sellers sold at a lower price and are in the process of making a new ‘lower low.’ We use the RSI indicator to take the highest probability trades by looking for ‘overbought’ and ‘oversold’ situations in the market.

Trade Setup

In order to use the strategy, we have considered the 4-hour chart of AUD/USD, where we will be illustrating a ‘long’ trade using the rules of the strategy.

Step 1:
The first step is to identify long-term support and resistance levels. By long-term we mean, support and resistance levels on the 1-hour time frame and above. Note that the greater number of touches, the stronger is the support or resistance. We would recommend at least three touches at the support or resistance to calling it a strong one. To raise the odds in our favour, we can look for trading at support level in an uptrend and resistance in a downtrend.
The below image shows long-term support being formed in the AUD/USD pair on the 4-hour chart.

Step 2:
Once we have identified the critical technical level, we will wait for the price to present the ‘cup and Handle’ pattern at support and ‘Inverse Cup and Handle’ pattern at resistance. Here we should make sure that when the price at support, the RSI indicates an oversold (below 30) situation in the market at least once and then shows up the pattern. On the other hand, when the price is at resistance, the RSI should cross above the level of 70, indicating an overbought situation and then show up the ‘Inverse cup and handle’ pattern.

Step 3:
After ensuring that the pattern is formed at the right place along with suitable indications from the RSI, we now discuss how to enter the trade. In a ‘cup and handle’ pattern, we enter ‘long’ right at the price break out above the ‘high’ of ‘cup’ pattern. In an ‘inverse cup and handle’ pattern, we enter ‘short’ when ‘price’ breaks below the ‘low’ of the ‘cup’ pattern.
The below image shows an example of we enter for a ‘buy’ at ‘support.’

Step 4:
After entering, it is essential to determine the stop-loss and take-profit levels for the trade. One of the primary reasons behind low risk-to-reward (RR) ratio is late ‘entry.’ Stop-loss is placed below the ‘low’ of the ‘handle’ pattern in a ‘long’ position and above the ‘high’ of the ‘handle’ pattern in a ‘short’ position. The strategy essentially says to enter when prices have travelled a decent amount of distance from support or resistance, which considerably reduces the risk-to-reward (RR) ratio.
The below image shows the result of the trade executed using the above strategy where the resultant risk-to-reward (RR) of the trade is 1:1.

Strategy Roundup

Although the ‘Cup and Handle’ pattern is a bullish continuation pattern, if we understand the logic of the pattern and apply at key technical levels, it can provide excellent opportunities for short as well as long-term traders. Using the RSI indicator along with the pattern gives an extra edge to the strategy, which makes it highly suitable in changing market environment.

Categories
Crypto Videos

Master Crypto Trading With The Cup & Handle Formation Part 2!

https://youtu.be/Z51csvdEIyc

https://youtu.be/Z51csvdEIyc


Make money in Crypto by spotting the Cup and Handle pattern – part 2/2

Picking a Profit Target


Determining the profit target is quite simple with this pattern; all you need to do is add the height of the cup to the point of breakout.
There will be times when the left side of the cup is a slightly different height than the right side. In this case, you should use the smaller height to stay on the conservative side, or the larger height for an aggressive approach.


In addition to using the cup and handle formation, you can use the Fibonacci extension indicator to create a great crypto trading strategy (as seen on the chart). Draw the extension tool from the low of the cup to the high on the right side of the cup. Then, connect the tool down to the handle low. The 1, or 100%, level represents a conservative price target, while the 1.618, or 162%, and represents a very aggressive target. The possible targets can then be placed anywhere in between 1 and 1.618.

Things to consider

Traditionally, the cup has a pause at the bottom of the cup built in the formation, where it moves sideways or forms a rounded bottom. This movement shows that the price found a support level and will not drop below it. However, this pattern can also have a so-called V-bottom.
A V-bottom occurs when the price drops and then sharply rallies. Some traders like trading this form of a cup and handle, while others do not. The argument of V-bottom traders is that the sharp reversal of the downtrend shows that buyers stepped in aggressively, signaling strength. Opponents of the V-bottom say that the price didn’t stabilize before bottoming, therefore making the price unstable and susceptible to retesting the level.
When trading this pattern, always look for additional confirmation. It can be found by looking for the bottom of the cup and seeing if it aligns with a longer-term support level. Consider using indicators and tools to determine the support and resistance levels and check if they align or interfere with the cup and handle targets.

Categories
Crypto Videos

Master Crypto Trading With The Cup & Handle Formation Part1!

https://youtu.be/HgahPm9cHqM

https://youtu.be/HgahPm9cHqM

Make money in Crypto by spotting the Cup and Handle pattern – part 1/2

Chart patterns occur on charts when the movements of the price of an asset resemble a common shape. In this case, we will be talking about the cup and handle formation. These patterns are a visual tool that helps traders make their market decision. Cup and handle provide a logical entry point, a stop-loss target for managing risk, as well as a price target for exiting a profitable trade.

The Cup and Handle

The cup and handle pattern is a strong tool for both small time frames (such as one-minute charts) and in large time frames. It occurs when the price trends down, then have a stabilizing period, then followed by a rally of approximately equal size to the aforementioned decline. This creates a U-shape, which is the “cup” in the “cup and handle” formation. However, this is only a part of the pattern. The price then moves sideways or goes down within a channel, which forms the handle. The handle can also take the form of a triangle.
An important rule to keep in mind is that the handle should always be smaller than the cup. Ideally, the handle should stay in the upper third of the cup. If it is too deep, it will erase most of the gains of the cup, which makes it quite an unsafe bet when it comes to trading on this pattern.

A cup and handle chart may signal one of two things! A reversal pattern, or A continuation pattern. A cup and handle signals a reversal pattern when the price is in a long-term downtrend. If a cup and handle pattern is formed during that time, it will signal a trend reversal. However, if the cup and handle formation occurs during an uptrend, then the pattern would signal trend continuation.

How to trade the cup and handle pattern
Determining the Entry point

In order to trade this pattern well, wait for a handle to form and the full pattern to play out. The handle often goes sideways, descends, or creates a triangle. The entry point should be when the price breaks above the top of this channel or triangle. As soon as the price moves out of the handle, the pattern should be considered complete. However, you might want to wait for a full candle to form outside of the pattern, so you get a real confirmation of the move, rather than blindly entering a false breakout.

Setting up a Stop-Loss

A stop-loss order is a risk-control measure on the trade. It works by selling the position if the price goes the opposite way and declines enough to invalidate the pattern. The stop-loss should be put below the lowest point of the handle or below the most recent swing low (only if the price oscillated up and down often).

Since the handle occurs within the upper half of the cup, a stop-loss that is properly placed should not end up in the lower half of the cup. If the stop-loss happens to be below the half-way point of the cup, try to avoid the trade if possible. Ideally, the stop-loss should be placed in the upper third of the cup pattern.

Check out part 2 of our Cup and Handle crypto trading guide to learn more about setting profit targets as well as some other important info regarding this candlestick formation.

Categories
Forex Basic Strategies

Trading The Bullish & Bearish ‘Cup and Handle’ Pattern

Introduction

Introduction

Introduction

The patterns on the Forex charts occur when the price movement of an underlying asset is in the form of the shapes that we come across in daily life. These are visual patterns, and they provide a logical entry point along with appropriate stop-loss and take-profit order placements. The Cup and Handle is one such pattern; this is one of the oldest chart pattern identified by technical trading experts back in the late 20th century. This pattern is very reliable and very commonly used by traders across the world.

American trader and author ‘William J. O’ Neil’ defined the Cup and Handle pattern in his 1988 classic, “How to Make Money in Stocks.” This pattern occurs in all the types of the markets and is not confined to Forex or Stocks. We can also find this pattern in almost all of the timeframe. Most traders prefer trading this pattern on a higher timeframe. Having said that, this pattern produces reliable trading signals on the lower timeframes as well.

The Cup and Handle is a continuation pattern that occurs after the ongoing bearish or bullish trend. In an uptrend, when the price action reaches a peak point, if there is a price wave down, followed by a rally (approx. the same size of the wave down), this pattern is formed. It means that the price action has created a U-Shape or the Cup, and the Handle is for the confirmation and entering the trade. After the Cup, most of the time, price action turns sideways, or it drifts downwards that appear in the form of a handle on the price chart.

According to market situations, the Handle takes different forms. It prints in the form of a triangle, rectangle, or even congestion. The critical point for the Handle is that its extension shouldn’t be smaller than the Cup. The Handle should not even drop into the lower half of the Cup. For instance, if a cup forms between 0.1000 and 0.1100, the Handle must not go below 0.1050. Identifying the Cup and Handle pattern on the price charts is easy compared to the other patterns that we have discussed until now.

The Cup And Handle Pattern – Trading Strategy

Buy Example

The below image represents the formation of a Cup and Handle pattern on the EUR/USD 15 minute chart. The highlighted part in the below chart is the Handle, and we can see the Cup on to its left.

 

There are many different ways to enter a trade using this pattern. In this particular example, let’s learn the most common way, which is the breakout method. A lot of advanced traders prefer trading the breakouts as they are reliable and work pretty well with the Cup and Handle pattern as well.

In the above chart, we can see that we had entered the market by placing a buy order when the price broke the primary resistance line. Now we can see why breakout trading is very reliable while trading this pattern. Our take-profit order was at the major resistance area, and stop-loss was just below the Handle. Here, we have seen how to trade this pattern for intraday trading. However, if you are a swing trader who plans to hold your position for more extended targets, please check out the next example.

Sell Example

In the below NZD/CAD 15 min Forex chart, we can observe the formation of an inverted Cup and Handle pattern.

Right after the formation of the Cup, the price moved in sideways and resulted in a handle-like structure. After struggling a bit, the price broke the support line and made a new lower low. We have taken the entry in this pair after the appearance of a bearish confirmation candle. Right after our entry, we can see the market dropping down and printing a new low.

As a basic rule, the stop-loss placement was just above the Handle, and we ride more extended targets in this pair. We closed all of our positions when the market had a hard time print a new lower low. If you are a trader who likes to ride deeper targets, close your position when you see a consolidation. The reason is that a consolidation phase implies that both the buyers and sellers are strong. So at that point, it is not easy for the price to print a brand new lower low.

Limitations Of The Cup and Handle Pattern

Everything strategy or a pattern will have some limitations to it, and the Cup and Handle pattern is no exception. Market experts believe that this pattern is unreliable to trade in an illiquid market. The depth of the Cup plays a significant role in the strategy to perform. If the depth of the Cup is more, it might generate false trading signals.

This pattern can be found quite often on a lower timeframe. Most of the time, on lower timeframes, the Cup forms without the Handle. So make sure to pair this pattern with other reliable indicators or price action techniques to filter out the false signals.

Bottom Line

William O’Neil spent 20 years to broaden his views towards various patterns and ways to trade them. The Cup and Handle pattern is one of the results of all that fantastic experience. His broader view allowed him to shift his attention from the classical trading patterns to wonderful patterns like these. Remember that you need to be at least a little better than the other traders out there to ace the market.

Hence it is important to have a different point of view that millions of traditional retail traders out there. The problem with the setup is that most of the traders use a similar approach to exit their positions. The way we showed you to close the positions when the market turns into consolidation is one such creative idea that we have to follow to have an edge. All the best!