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The cup and handle pattern is a technical indicator. The name explains exactly what you should expect. The cup will appear in the shape of a big letter u, and the handle will be a line drifting downwards.
This specific pattern will usually form as quickly as seven weeks. It also could need up to sixty weeks to be considered complete. In both scenarios, you will need to be very patient when dealing with this pattern.
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The cup and handle pattern can come in many different shapes and sizes. However, there are a few things that you want to be careful with. The more specific you are, the more likely your analysis will be correct.
Length: The cups with longer and more “U” shaped bottoms provide a stronger signal. You want to avoid cups with a sharp “V” bottoms.
Depth: The cup should not be overly deep. You want to avoid handles that are overly deep also, as handles should form in the top half of the cup pattern.
Volume: As the price declines, so should the volume. It should then increase when the price moves back up, testing the previous highs.
Yes. The cup and handle is considered a bullish pattern. William O’Neil, the American technician who defined the cup and handle pattern in 1988, identified four primary stages of this technical trading pattern.
1. About one to three months prior to the “cup” pattern begins, an instrument will reach a new high in an uptrend.
2. The instrument will then retrace, dropping no more than 50% of the previous high creating a rounding bottom.
3. The instrument will rebound to its previous high, but subsequently decline, forming the “handle” part of the formation.
4. The instrument breaks out again, surpassing its highs that are equal to the depth of the cup’s low point.
Like we always say, it is not best practice to use one technical indicator as enough research to enter a trade. Many traders like using the cup and handle as solid proof of an upcoming price move. However, it is important to use this indicator in addition to several other indicators to build your case.
It is also very important to note that the cup and handle specifically is a pattern that requires a lot of patience. A pattern that could take up to 65 weeks to form is one you should be cautious with. Entering a trade too quickly could be detrimental to your trading account.
Another thing to consider is the depth of the cup. While a shallow cup can be a real signal and lead to a successful trade, deep cups can be a false signal. Sometimes, the cup will form without the handle. Therefore, it is important to be patient and calculate everything closely.
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