The cup and handle pattern in binary options trading helps the trader to identify the ongoing bullish trend in the market and also helps in predicting the future of the asset. In this article, you will learn more about the cup and handle pattern in binary options trading, specifically how to identify it and how to use it to take your trading to the next level.
God to know:
- The cup and handle pattern indicates a bullish market trend.
- It consists of a ‘U’ shaped cup and a slight downward handle.
- A proper pattern has a specific depth and volume increase.
- An inverted pattern suggests a bearish reversal.
What is the Cup and Handle Pattern strategy?
What you will read in this Post
The cup and handle pattern strategy is all about using the ‘cup and handle’ technical indicator to read the market flow. This indicator was first introduced in the book “How to make money in stocks” (1988) 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.
See an example below:
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.
- Volume – the volume must be high along with the breakout.
- Price Target– the expected target is in the upright distance.
- Stop-loss– the most used and beneficial term, ‘stop-loss,’ is used at the lowermost point of the handle.
- 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.
- 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 a cup and handle 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-
- 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.
- 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-
- The momentum is feeble.
- There is no news affecting the market with high impact.
- The rise in volume is negligible.
- 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.
- Inspect for any breakout in an asset.
- Find the assets that are breaking out. You can use filters like volume filter, ADX crossover, etc., for the same purpose.
- Screen for the assets that are contained in consolidations. For this, you can use filters like ADX crossover and the volume filter.
- 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 close above the Ichimoku cloud.
This is a technical indicator used in trading that signals resistance and support levels. It also evaluates momentum. Its actual name is Ichimoku Kinko Hyo, which means ‘one look’. It is so named because with a single glance, the investor can get a wide range of statistics.
Using it in the cup and handle will increase your chances of winning the trade. For example, if your stock successfully closes above the cloud, the trend is reinforced. 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 signals in the market.
These are a few strategies that are effective and can be used during the formation of cup and handle patterns. Other than these, you can formulate your own strategy or plans to execute a successful trade.
Don’ts when using the cup and handle strategy
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 other patterns and indicators, the cup and handle has some drawbacks and limitations. There are many cases where the pattern fails to make a profit because of some negative news that affects the market flow.
Therefore, it is always advisable to wait for the pattern to complete. And before making your trade, use the pattern with the other indicators or signals. In addition, you should consider the size of the handle. It should not exceed 50% of the cup size.
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.
Conclusion – Trade productively using the cup and handle pattern
In conclusion, Cup and Handle is one of the oldest and most used patterns in binary options. It is a long term pattern also known as ‘Saucer and Handle’. It is very reliable and helpful. Therefore, if you want to trade binary options, you need to learn the aspects of this pattern.
The catch here is that you need to closely monitor the before pattern and the post pattern scenario as they are key factors in determining the upcoming trend. Use various indicators, filters and other technical parameters to measure and confirm the pattern.
With effective measures, traders can enter the market for the long term. It is one of the patterns that offers good risk reward. You need to be patient and persistent in binary options trading. With some practice and learning, you can trade any pattern productively.
Frequently asked questions about the cup and handle pattern in binary options trading:
What is a “Cup and Handle” pattern in the financial market?
The “Cup and Handle” pattern is a technical chart pattern resembling a teacup with a handle. It indicates a bullish trend where the ‘cup’ is formed by a price decrease followed by a stabilization and an increase back to the starting level, and the ‘handle’ forms with a slight downward or sideways movement.
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.
What are the key phases in the formation of a Cup and Handle pattern?
There are four key phases: 1) A market decline forms the left side of the cup. 2) The price stabilizes, forming the bottom of the cup. 3) Bullish traders drive the price up, forming the right side of the cup. 4) The handle forms through a range-bound movement with both buyers and sellers balancing out.
What is a “Cup and Handle” pattern?
It’s a bullish chart pattern shaped like a teacup with a handle, indicating a potential upward trend in asset prices.
What are key characteristics of a Cup and Handle pattern?
Characteristics include a U-shaped cup, specific depth and duration, consistent price fluctuations, and increasing volume.
What are limitations of the Cup and Handle pattern?
Limitations include ambiguity in formation time, potential false signals, and difficulty in identifying the handle.