Cup with handle pattern: taking profit on trend continuation
- VFX Blog
- For beginners
So many books have been written about the importance of identifying patterns in technical analysis that the variety of tips for beginners can make your head spin. Out of the large set of patterns, the “Cup with handle” stands out - although this binary options signal does not occupy a leading position in trading in terms of frequency of occurrence, it allows you to earn stable income with timely identification. In this article, we will analyze all the rules for identifying and confirming a pattern, give traders advice on the best time to open and close options and ensure a minimum level of risk for their trading system.
Unlike most classic candlestick analysis patterns, the Cup with a Handle pattern appeared not so long ago. It first appears in William J. O'Neil, a renowned author of books on technical analysis. Such binary options trading signals were found on a variety of assets that showed the formation of stable trading formations. Let us immediately note one of the features of the formation of this formation - a long time interval. More often it is possible to identify a pattern on a trend with a period of a day or a week. With the development and digitalization of trading, traders began to notice it at shorter intervals, for example, hourly.
Finding the pattern on the chart?
To consider the pattern as fully formed, the following conditions must be met:
1. On the chart should be clearly visible uptrend. The rule is true for a classic figure — there is also an inverted modification of the pattern, which requires a downward movement.
2. The “body” itself is a correction of the previous trend with the left side, pushing away from local support (bottom of the bowl) and subsequent growth in the previous direction by the right half. The main criterion is that the drawdown should not exceed 80% of the entire previous trend. No matter what timeframe we are talking about, if the decline exceeds this indicator, it means that it is not a short-term fall that is involved, but a reversal of the trend.
3. The right part in this figure may be in the form of another pattern "flag". This is a small flat price corridor directed in the opposite direction to the uptrend. In Forex, as in other financial markets, including online binary trading, at such moments, another local correction often occurs. At such moments, the chart goes through another small stage of growth, limit orders are closed for large orders of those traders who still hoped for a reversal.
4. The author noted a rather long period of full drawing on the chart - when using standard charts in one week; this can take up to 3 months. The more important and informative is the identification of the model on the chart. It should not be forgotten that automatic systems can also detect many technical trends. Therefore, it can be argued that «Cup with handle» pattern will be played back by binary option robot it is detected, which will entail an increase in the number of orders during the trend continuation.
Another factor is that the longer the chart consolidates, the stronger the subsequent move will be.
5. Finally, you can say that the formation occurred only after the graph breaks through the upper line of the pattern top of the «Cup» (see image below).
6. Market volumes for O'Neil should behave as follows:
decrease when the left half appears;
stay low when drawing the bottom;
they gradually increase when the trend turns into growth and reach high rates when the last line of the pattern is broken.
When to open a trade?
To fully implement the formation of the «Cup», a trader must act as follows - open an option at the moment of breaking the upper line of the right side. A more conservative binary options strategy is to enter only when the price crosses the bottom of the upper part of the pattern. The expiration is calculated at the lower border of the flag, or at the level of its resistance if opened along the common border (wide blue line in the figure).
Do not forget that the pattern at all stages of its formation must have confirmation of the trading volume data (even tick data). There is a logical explanation for this rule: the more orders are opened during the development of the market situation, the stronger their belief in the reverse course of the trend.
The reverse pattern
Like the base pattern, an inverted (reverse) Cup with handle indicates a local reversal, which on a longer timeframe looks like another correction of the global trend. Let's look at a chart similar to Binomo trading signals: