The trend is your friend, trade with the trend. At first glance, trading is simple: buy what’s growing, sell what’s falling. However, when the trend is clearly visible on the chart, there is a risk of falling into the trap of a player trying to jump into the last car of a departing train. The trend may be at the last stage of the life cycle, followed by a reversal. On the contrary, when the trend is not clearly visible and is just beginning to take shape, who will guarantee that the market will not fall into consolidation or we are not talking about a pullback? In order to effectively trade with a trend, you need to know about patterns for continuing a trend. One of them is the “Cup with the handle”
Visually, the model resembles a tea-drinking device with a rounded bottom (“Cup”) rounded for a long time and quick rollback and trend restoration (“Handle”). The tops of the Cup should be approximately flush. Exactly where is the resistance, a breakthrough which will allow the “bulls” to continue the northern campaign? Under the edges of the “Cup” and “Handle”, the minimums of the bars at which the tops of the pattern were reached are mentioned. They allow you to designate it on the chart. In addition, according to Thomas Bulkovsky, the author of the bestselling book “The Complete Encyclopedia of Graphic Price Patterns,” if the left edge of the Handle is higher than the right, the effectiveness of strategies based on the “Cup with Handle” pattern increases.
According to the authors, who also include William O’Neill, who wrote the book “How to Make Money on Shares” in 1988, the Cup is formed on the daily chart for 7-65 weeks, and the Pen for 1-2 weeks. Before the rollback, the asset should grow by 30%. All this is relevant for the stock market, for Forex such a rapid growth of currency pairs can occur for years, therefore, in my opinion, 7-15% of the rally is enough to apply the pattern in practice. On the daily chart USD / NOK, we are talking about 11%.
An important feature is the growing volumes in the area of the bottom of the Cup. They testify that major players intend to defend long positions. Thomas Bulkovsky notes: the faster the Pen is formed, the more efficient the model is. According to his research, targets ranging in size from the bottom of the Cup to its right peak work out at 50% in the bull market and in 27% at the bear market. If the target is halved, then the chances will increase significantly: up to 76% and 55%, respectively.
The easiest way to trade according to the “Cup with a handle” pattern is to enter a long position on the breakthrough of resistance, built on the highs of the Cup after the handle is formed. A protective stop order is placed at the minimum of one of the previous kickbacks, we talked about targets a little higher. At the same time, another one can be formed inside the Cup, which can be called a daughter. In this situation, it makes sense to open a deal to buy an asset at the level of the right maximum of the inner Cup.
Another clue that you are dealing with the correct model is falling volumes at the stage of the formation of the Handle. They signal that large buyers are testing the strength of their opponents. If there are no serious opponents, you can with good conscience go north.
In general, the “Cup with handle” pattern allows you to quite effectively track kickbacks and work within the framework of the basic principle of technical analysis “Trend is your friend, trade-in trend.”