When it comes to pattern recognition, some are more effective than others. And when it comes to predicting rising prices, one of the most accurate patterns is the cup and handle pattern. Because it is so accurate, crafting a trading strategy that looks for this before you execute a trade can be extremely beneficial. In this article, we will examine how to identify this pattern, how to use it in your overall strategy, and what sort of things you should be looking out for before and during the use of it.
Application of the Cup and Handle
One of the nice things about the cup and handle pattern is that it’s easy to use and apply. The pattern takes place at the end of a bearish phase, and signals that a bullish phase is about to begin. It can be recognized by a large dip in price followed by a complete recovery, and then a small dip in price, followed by that dip recovering. When this is seen after a prolonged drop in price, short sellers use it as a signal that their position needs to be covered. The pattern, when looked at as part of a line chart, looks like a teacup with a handle, with the handle being on the right hand side of the chart.
When you see this, it is time to take out a long position, or, as we are trading binary options, you want to initiate a call option on the asset that you are looking at. However, the question remains as to how long the timeframe that you should be looking at for your options should be. The answer to this question depends upon the increments of the original chart that you were look at had. If you are looking at a chart that shows increments of 5 minutes, then a 30 to 60 minute call option should be executed. If you’re looking at a chart with 60 second increments, then a 5 to 15 minute call option should be executed.
In short, this strategy is extremely simple. First, find an asset that has been dropping in price consistently. Second, identify a cup and handle pattern within a price chart. Third, identify the timeframe of the increments in the chart that you are using to examine the asset, multiply that number by five, and then find the closest expiry (rounding up) for your option. Always ensure that the option that you are taking out is a call option.
Although this signal is typically used in the stock market, it is applicable into other markets, too.
Things Can Go Wrong
There are several drawbacks to the cup and handle pattern, although many of them are generic for using patterns in general. The biggest problem that you are going to run into with this trading strategy is that your trade might not materialize in the way that you expect it to. This is a signal that short seller have typically used in the stock market to know when they should cover their positions. It is usually indicative of a price reversal, but it can also be indicative that prices are going to become range bound before they begin going up. When this happens, you might get lucky and still have a winning trade, but it is now a 50/50 chance that this will happen. In order to overcome this, you may want to hedge your position if you find yourself stuck in a range and the outcome of your trade becomes questionable. This can also increase your risk and the costs associated with trading. And, as you probably know, hedging is a very difficult task and not all traders are skilled in it.
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