Hello Dear Readers,
When trading in financial markets, one of the main truths I
have learned through years of experience is the use of correct strategies.
Correct strategies form the foundation of successful trading. In the face of
ever-changing market conditions and uncertainties, trading without a strong
strategy prevents us from achieving the desired outcome. Fortunately, technical
analysis acts as a right-hand man in our financial trading. Chart formations in
technical analysis are truly valuable tools for every trader. One of these
chart formations is the "Inverted Cup and Handle" pattern.
What is the Inverted Cup and Handle Pattern?
Inverted Cup and Handle is a chart pattern known as a
continuation of the bearish market trend. This pattern can sometimes also be
the beginning of a downtrend. The Inverted Cup and Handle is just one of the
chart formations in technical analysis that signals a price decline. When
observed on the price chart, bears become more dominant in the market, and
sellers increase, aiming to drive prices even lower. The Inverted Cup and
Handle formation is mostly observed in a downtrend, but sometimes also at the
end of an uptrend. In both cases, the downward trend may continue.
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| Inverse Cup and Handle Pattern |
Formation of the Inverted Cup and Handle Pattern
The Inverted Cup and Handle pattern, in contrast to the Cup
and Handle pattern, differs both in appearance and trend direction. Visually,
it resembles a shape of inverted cup with a handle on the chart. In terms of
price direction, while the Cup and Handle is a bullish continuation pattern,
the Inverted Cup and Handle is known as a bearish continuation pattern. The
following basic elements are involved in the formation of the Inverse Cup and
Handle pattern:
Inverted Cup: Firstly, asset prices start to rise slowly,
breaking away from a clear downtrend. Then, this upward movement weakens and
stops. Subsequently, prices curve downward again with a shallow curve. During
this process, a reversed "U" shape forms on the chart, completing the
Inverted Cup formation.
Handle: On the right side of the Inverted Cup, there is a
section where the price forms a handle by slightly fluctuating upward or
downward. In this section, prices usually rise slightly and then experience a
minor decline. This pullback forms the handle part of the pattern, which often
occurs with lower volume.
In the formation of the Inverted Cup and Handle pattern, the
support level encountered by prices during the downtrend is influential. During
the first decline phase, prices can't break below this support level
(neckline), forming the Inverted Cup. Similarly, during the second decline
phase, prices fail to breach this support level (neckline) again, forming the
handle. The handle can appear about one-third the length of the cup's depth.
How to Trade the Inverted Cup and Handle Pattern?
When an Inverted Cup and Handle pattern is seen, it is
usually considered a bearish signal. Price movement below the neckline and
breaking this level strengthen the expectation of a decline. It is preferable
to sell when a breakout occurs at the support level below the handle area.
Confirming this signal with other technical indicators before going short will
be more reliable.
Entry: If the price breaks below the neckline and does not
reverse, a sell position can be opened. Sometimes, the price may retest the
broken neckline before reversing. In this case, a retest followed by a
continued decline is expected, and a sell order can be placed.
Stop Loss: When setting a stop-loss level, it is generally
preferred to place a stop-loss order a few pips above the handle area or above
the neckline.
Target: In the Inverted Cup and Handle formation, the target
price is determined by extending a line downwards from the neckline by the
depth of the cup. For this process, the height of the inverted cup part of the
formation is first measured. This height corresponds to the distance from the
bottom level to the highest point of the cup. The measured height is then
extended downwards from the neckline to determine the target price.
Take a look at an example of a trade with the Inverted Cup
and Handle pattern seen on the 1-hour chart for the Pound Sterling/Swiss Franc
currency pair below:
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| Inverted Cup and Handle on GBP/CHF chart |
Don't say "he didn't say": The Forex market is highly liquid, but it's not always possible to protect oneself from unexpected price fluctuations. Like any chart formation, the Inverted Cup and Handle pattern may not always provide accurate signals. Therefore, it's important to verify price movements using multiple confirmation methods in trading strategies and to prioritize risk management.