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Forex Trading Strategy with Cup and Handle Pattern

The cup and handle pattern is a rare but highly probable occurrence in the forex market. How do you identify and use it correctly? The cup and handle pattern, resembling a cup with its handle, is a high probability pattern but rare in occurrence. Unlike other patterns such as double top, double bottom, head and shoulders, flag, or symmetrical triangle which form frequently, the cup and handle pattern requires a considerable amount of time to form. Nevertheless, if recognized and used correctly, this pattern can yield highly profitable results. How do you use it?

What is the Cup And Handle Pattern?

The cup and handle pattern resembles the shape of a cup when viewed on a price chart. It consists of two main components:

  1. Cup: Formed from gradually rising price movements after a decline.
  2. Handle: Formed from gradually declining price movements after reaching its peak in the cup.

This pattern usually occurs within a timeframe of 7 to 65 weeks. The cup and handle pattern occurs after the price of a forex pair declines and then experiences a period of stability. Afterward, the price rises again to reach the level before the decline and moves sideways or slightly downwards.

How to Use the Cup And Handle Pattern in Trading

The cup and handle pattern can provide bullish signals during the sideways movement at the bottom of the cup. Therefore, traders can use it to enter positions.

  1. Buy during the sideways phase at the bottom of the cup and handle pattern: When there is sideways movement at the bottom of the cup and handle pattern, traders can utilize bullish candle formations or breakouts of resistance levels to open buy positions.
  2. Buy or sell after a breakout occurs on the handle: After a breakout occurs on the handle, traders can open positions according to the direction of the breakout.

Inverted Cup and Handle Pattern

The inverted cup and handle pattern is an inverse variant of the cup and handle pattern indicating potential price declines. The principle is the same, but the direction of price movement is opposite.

  1. Identify the Pattern: Identify the inverted cup and handle pattern on the price chart.
  2. Confirm the Pattern: Ensure the pattern is confirmed, including an increase in trading volume when the pattern forms.
  3. Determine Entry Points: Enter the trade when the price crosses the resistance line formed by the top of the handle.
  4. Stop Loss and Target Profit: Set stop loss and target profit levels to manage risk and take profits.

Things to Watch Out For

Some things to consider when trading forex with the cup and handle pattern include:

  1. Imperfect patterns.
  2. Unsupportive market conditions.
  3. Fundamental factors to be considered.

The cup and handle pattern is a bullish continuation pattern that occurs after a previous bullish trend. This pattern can provide strong trading signals if recognized and used correctly. The inverted cup and handle pattern is an inverse variant of the cup and handle pattern indicating potential price declines. It is important to pay attention to market conditions and fundamental factors when using this pattern in forex trading.

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