Cup & Handle
It is a chart pattern that looks like a cup with a handle and is used to identify areas of support and resistance. The pattern starts with a cup formation, which shows a period of gradual increase in price, followed by a slight decrease. After the decrease, the price moves higher, forming the handle. When the price of an instrument breaks above the high of the handle, it is considered a buy signal.
The Cup and Handle pattern is a bullish continuation pattern that signifies a temporary pause in an uptrend before the price resumes its upward movement. It consists of two parts:
Cup: The cup portion of the pattern resembles a rounded bottom or a “U” shape on the price chart. This indicates a period of consolidation or correction after a significant upward move. The cup should have a smooth and rounded shape, without any sharp or steep declines.
Handle: Following the cup formation, there is a small consolidation or retracement known as the handle. The handle is a short-term downward movement in the price, typically forming a smaller consolidation or downward sloping channel.
The pattern is considered complete when the price breaks above the resistance level formed by the high point of the cup. This breakout signals the continuation of the previous uptrend, and traders often interpret it as a bullish signal to enter long positions.
Inverted Cup & Handle
Inverted cup and handle is a chart pattern which is identical to the cup and handle, except for the fact that once it forms bearish trend is expected to continue. This is the reason this chart pattern is one of the continuation chart patterns as it represents the retracement of the higher trend. If the price of an instrument breaks the support level of the handle, traders may anticipate a bearish trend.
The Inverted Cup and Handle pattern is the bearish counterpart of the Cup and Handle pattern. It indicates a temporary pause in a downtrend before the price resumes its downward movement. The pattern consists of two parts:
Inverted Cup: The inverted cup resembles an upside-down “U” shape or a rounded top on the price chart. It represents a period of consolidation or correction after a significant downward move. Similar to the Cup and Handle pattern, the inverted cup should have a smooth and rounded shape, without any sudden spikes or upward movements.
Handle: Following the inverted cup formation, there is a small consolidation or retracement known as the handle. The handle represents a short-term upward movement in the price, often forming a smaller consolidation or upward sloping channel.
The pattern is considered complete when the price breaks below the support level formed by the low point of the inverted cup. This breakdown signals the continuation of the previous downtrend, and traders often interpret it as a bearish signal to enter short positions.
Both the Cup and Handle pattern and the Inverted Cup and Handle pattern are considered reliable when they meet certain criteria, such as clear and well-defined shapes, appropriate volume patterns, and confirmed breakouts or breakdowns. Traders often use additional technical indicators or price action confirmation to validate these patterns before making trading decisions.
