The Cup and Handle Pattern in Binary Options trading

Examining the chart pattern is one of the fundamental aspects of trading binaries. The chart analysis helps the trader to recognize the ongoing market trend and further helps in predicting the future of the asset.

The chart patterns aids in joining the different financial market conditions. You can identify when the market is going sideways and when in a downtrend or uptrend. Hence, it is important to check the chart and the patterns therein.

For the same purpose, there are numerous technical indicators, filters, and other trading tools. 

What is Cup and Handle Pattern?

The cup and handle patterns are one such technical indicator that is used to read the market flow. It was introduced for the first time in a book named “How to make money in stocks” (1988) penned by William O Neil.

As the name suggests- this pattern is formed in a ‘U’ shape with a downshift handle. The pattern formation can be for the short term or even for the long term. It is generally considered a bullish market. 

Formation of Cup and Handle 

The cup in a cup and handle pattern is created when there is a price downtrend which is soon stabilized, and again the price goes up equivalent to the decline forming a ‘U’ shape. When the price goes either in a downward trend or sideways, the handle is formed.

This can be read in four different phases- 

Phase #1 – The left side of the ‘cup’ is formed when the market declines.

Phase #2 – The downtrend makes the price goes sideways, forming the bottom of the cup. Here, the bullish investors leave the positions. 

Phase #3 – The bull traders come into action. They make the price go up. This forms the other side of the ‘cup.’ 

Phase #4 – With both sides equal, the sellers and purchasers become even. Lastly, a range-bound movement builds the ‘handle.’

The trend can make the handle triangle in shape as well. With the formation of the handle, traders anticipate an entry point to buy the assets.  

Characteristics of the Pattern 

#1 Legit Cup and handle shape

The cup and handle have a standard shape of a teacup. It is formed when the upward moving market trend goes down due to the increase in the selling ratio. The ‘U’ shape cup is traded the most, whereas a ‘V’ shaped cup is derived when there is a quick recovery of the asset. Unlike U-shaped one, there is no halt in the price, and it is very likely to crash. 

#2 Perfect depth 

The depth of the cup plays an important role. According to a general rule, the most suitable depth is when the shape is retraced 1/3 or less. However, in a volatile market trend, the depth could go around ½, and in some situations, it could even go up to 2/3. 

#3 Duration 

The build-up time of this pattern can range from weeks up to months. It is believed that dependability increases in a longer time frame. An ideal structure is when the handle is smaller than the cup. 

#4 Pullback before breakout

The pullback before a breakout forms a handle that is always present on the right side of the chart. The handle could be flag-shaped or pennant-shaped.

#5 Price fluctuations 

For a suitable structure, there should not be any big reductions and severe gains on the left and right sides of the cup, respectively. The bottom should be smooth with minor fluctuations. 

#6 Volume 

The volume could be negligible at the base of the cup but has to increase with the rise in asset price. 

#7 Profits from the pattern 

You can calculate the expected growth in price. For a rough assessment, take the distance from the bottom to the highest point on the right side of the cup and then combine it with the breakout point. 

The result will provide you with the potential price target. Use different indicators for better results.

Things to know before trading Cup and Handle Pattern 

Other than ‘cup’ and ‘handle,’ there are some other basic details that are helpful for every trader. 

  1. Volume – the volume must be high along with the breakout.
  2. Price Target– the expected target is in the upright distance.
  3. Stop-loss– the most used and beneficial term, ‘stop-loss,’ is used at the lowermost point of the handle. 
  4. Period– it is the time taken by the pattern to develop. The cup has a formation period of 1 to 6 months. And handle takes around 1 to 4 weeks.
  5. Depth – the depth of the cup, which is considered an idea, is when it goes back over either 1/3 or less than 1/3 of the preceding advance. 

Are Cup and Handle in Binary Options bullish?

As a common rule, the cup and handle patterns are considered bullish in nature. The originator, William O’Neil, stated some segments in his book. 

According to him, the first segment begins 1 to 3 months prior to the formation of the pattern. Here, the price of an asset will go extremely high. In the next step, the price will go back over and drops around 50% and forms a round bottom. 

Next, the price will recover, and in the fourth segment, the handle will assemble.

This pattern hence shows a bullish market. 

Can this pattern become bearish? 

The pattern can be formed upside down. Inverted cup and handle will be formed in 3 to 6 months. This pattern shows a bearish reversal. The price here will break below the resistance. 

The features are similar to the bullish pattern. Entering into a short position and setting a stop-loss reversal is the best way to trade an inverted pattern. 

What happens after a Cup and Handle Pattern?

After the completion of the cup and handle pattern, you will have the opportunity to enter into the trade with call options. The potential bull market shows that the trend will flow in the upward direction, making it a suitable condition for bullish traders.

In order to trade the Cup and Handle, first, you have to spot the pattern on the price chart. The expected breakout takes place after the handle is formed. And because the pattern implicates an upward trend, i.e., a bullish market, use the ‘call’ option. 

Place your call immediately after you see the pattern completing and a spike forming. You can set the binary options trade from 1 minute to 1 hour. It can be purchased right after the breakout of price over the resistance level. 

Always scrutinize different time frames because this pattern takes its sweet time to develop. You can use either ‘touch’ or ‘no touch’ options depending upon the situation. 

  • One-Touch

As a binary trader, use the one-touch only when you see a break out happening above the ‘handle’ of the pattern.

After the completion and spotting the pattern, traders can enter into a one-touch deal. For this option, the following conditions are required to be fulfilled- 

  1. The target price laid out by the brokerage firm for the call options should be either equal to or more than the possible price target.
  2. The momentum of the flow should be strong enough to support the uptrend, and the volume must escalate when the price goes above the resistance level, i.e., the handle. 
  • No Touch 

It is one of the most suitable and used options in binary trading. In the cup and handle pattern, the breakout is very strong since it took months to develop. 

Therefore, traders can use ‘no-touch options’ after the breakout, and it will eventually end in profits. This contract also requires strong support from the volume and momentum. 

Other than these, a trader can also use ‘double one touch’ options and ‘double no-touch options. Though, they are not effective as compared to the above-mentioned options. 

The ‘double no touch’ options require four conditions-

  1. The momentum is feeble.
  2. There is no news affecting the market with high impact.
  3. The rise in volume is negligible. 
  4. The price breaks above the resistance level or the handle. 

How do you screen for Cup and Handle Pattern?

What is screening?

It is a trading tool through which you can check the available assets as per your own norms. These tools are available on your trading platform. It could be free or subscription-based. 

With the screen tools, you can use your own rules and conditions. This also helps in finding trading chances. These tools can be used by technical/fundamental traders as well as by professional or hobby traders. 

Scanning or screening a cup and handle pattern is easy as well as important. There are automatic screeners that can be used to locate this pattern.

  1. Inspect for any breakout in an asset. 
  1. Find the assets that are breaking out. You can use filters like volume filter, ADX crossover, etc., for the same purpose. 
  1. Screen for the assets that are contained in consolidations. For this, you can use filters like ADX crossover and the volume filter. 
  1. Last is to screen for the exhaustion gaps. ADX, along with the Bollinger bands, can be used. 

Strategies for Cup and Handle Pattern trading

Cup and handle are some of the most relied upon patterns and are effective if used properly. Given below are some strategies which you can apply to trade this pattern, especially if you are a beginner. 

# 1 Strategy

It is evident that the time is taken, shape, and formation of every handle are different. The handle is that compound that can promote the price of an asset. Hence, it is important to trade during a strong handle. 

A durable and resilient handle has the following traits – 

  • The candlesticks used to make the handle are very closely packed.
  • The price gets an extension timed with the volume during the breakout.
  • The breakout candlesticks should be closed above the resistance level. 
  • In short time frames, for example, in 5 minutes, the handle is composed of 4 to 10 candles. This will minimize the situation of the sideways price flow challenge. 

These features show a remarkable potency in volume, and speed and trading will ultimately lead to profits.

# 2 Strategy 

You can buy the assets after the candlesticks of the pattern have closed over the Ichimoku cloud.

It is a technical indicator used in trading which signals resistance and support levels. It also evaluates the momentum. Its actual name is Ichimoku Kinko Hyo meaning ‘one look.’ It is named so because, with a single glance, the investor can get a wide range of statistics. 

Using it in cup and handle will increase your chances of winning the trade. For instance, the trend is intensified if your asset successfully closes above the cloud. And if it does not, then the bulls should leave the trade because the bears are now in charge. 

Ichimoku indicators can also be used to avoid false indications in the market. 

These are few strategies that are effective and can be applied during the cup and handle pattern formation. Other than these, you can formulate your own strategy or plans in order to perform a successful trade.

Don’t (s) in Cup and Handle 

These are the following points which must be avoided in order to make a successful trade- 

  • Do not trade a V shape cup. The ideal shape is U. 
  • Observe a previous uptrend. Cup and handle are not reliable when there is no prior uptrend before the actual creation of the pattern. 
  • Do not trade shallow cups.
  • Do not make your call before the completion of the structure. Any trade placed before will probably result in loss. 
  • The size of the handle must not exceed the size of the cup. Therefore, in the opposite scenario do not performs any contract. 
  • Never trade a handle with an upward or sideways trend. It should flow on a downward trajectory always. 
  • Never call any trade when there is no rise in the volume during the increase in price. 

Limitations of the Cup and Handle Pattern 

Like all the other patterns and indicators, cup and handle also have some drawbacks and limitations. There are many cases where the pattern fails to generate profit because of some negative news that affects the market flow. 

Hence it is advised to always wait for the accomplishment of the pattern. And before making your trade, use the pattern with the other indicators or signals. In addition, observe the size of the handle. It should not exceed 50% of the size of the cup. 

Some common limitations of cup and handle pattern are- 

  • It Is Ambiguous in Nature

The pattern could take months or even years to complete. This results in an overdue trade decision. 

  • Can Generate a False Signal 

The depth of the cup plays an important role. But many a time, a deep cup produces a false signal, whereas a cup with shallow bottom can be an indication. 

  • Hard to Recognize the Handle

The handle is sometimes not distinct, making it hard for the traders to make any decision. 

These are some of the limitations which can disrupt your trading experience. However, they can easily be overcome by the use of additional filters, screeners, and indicators. 

What are the types of Patterns? 

This pattern can show both – a continuation or a reversal pattern. 
The Continuation Patterns 

Here, the price of an asset goes uptrend, which forms a cup and handles and continues to rise. 
The Reversal Patterns 
The price starts to rise after being in a downtrend for a long time, forming the pattern of a cup and handle. This reverses the whole market situation, and the price starts to flow in an upward direction.

What Is the Right Time to Enter the Pattern? 
Always wait for the completion of the pattern. The handle opens up the entry point, so buy the asset when the price goes above the handle because the chances of the price rising after the breakout point are extremely high. 

Is there any need for Stop-Loss? 

You need to use the stop loss since it is not always guaranteed that the price will go uptrend. Sometimes it might go sideways or fall after rising a little bit. While in some cases, it drops down immediately. Hence, the stop-loss order is necessary to get you out of the trade.

Conclusion 

Cup and handle are one of the oldest and most used patterns in binary options. It is a long-term pattern which is also known as ‘Saucer and Handle.’ It is extremely reliable and helpful. Thus, if you trade binary options, then you must learn the aspects of this pattern. 

The catch here is to closely monitor the before pattern and post pattern scenario as they are key factors in determining the upcoming trend. Use different indicators, filters, and other technical parameters to gauge and confirm the pattern.  

With effective measures, traders can enter the market in the long term. It is one of those patterns which provides you with good risk rewards. You have to be patient and persistent in binary options trading. With some practice and learning, you can trade any pattern productively. 

About the author

Blogger at www.willascherrybomb.de Copywriter website: www.yvonnes-schreiberei.de

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