Regera

How to trade a cup and handle pattern

Education
BINANCE:BTCUSDT   Bitcoin / TetherUS
The cup and handle is one of the most easily recognizable charting patterns yet so many people don't know how to trade it. At first glance people see the cup then the throwback forming the handle and automatically think "This is going up! BUY BUY BUY!" But where exactly should they buy?

I’ll preface with this: One key difference between trading and investing is that traders do not hold for the long term, especially when their trade fails. Experienced traders wait for high probability setups that give closure to their decision in a short time frame. Capital is key and while a lot of people don’t realize it the most important position to have is cash. Cash can capitalize on greedy and inexperienced traders and the market that follows their poor decision making. Cash provides opportunities for higher gains with lower comparable risk. 50/50 setups are for gamblers. Sheep chasing trends will get slaughtered.

How does this relate to the cup and handle formation? Ask yourself: where would you buy in a cup and handle formation?

Technically the throwback should not decline more than half of the cup or else the pattern fails. The dotted lines on the chart represent the halfway point of each cup. The prior failed cup and handle formations declined 40% and 48% respectively from the halfway point of the cup. This means any trades that were made before the pattern failed and didn’t use a stop loss would have to gain 66% & 93% just to make it back to the halfway point of that cup. If that isn’t a lesson on the importance of stop loss, then I don’t know what is.

On average a successful cup and handle formation will see an average rise of 15% – 35% from the lip of the cup. When price moves above the lip the failure rate drops to 10% meaning there’s a 90% chance that trade will be profitable. It is for that reason that the textbook entry for a cup and handle formation is AFTER it breaks above the lip resistance and immediately the trader will have a 90% chance of taking profits.

The other entry point for a cup and handle formation is at the halfway point of the cup with a stop loss set under it in case the pattern fails. When the handle reforms and price moves back to the lip, SELL! If the price breaks above the lip then reenter with that 90% success rate. It’s worth giving up a few percent to see which way the market will react while replenishing the cash position with profits if the pattern ultimately fails.
Remember, high probability setups that give closure are essential for a trader to be successful. In both those instances it should be quite clear over the short term if the trade was profitable and best positioned the trader given the pattern.

With all the chatter surround Bitcoin’s current cup and handle formation I hope this sheds some light on how successful traders would approach it
Comment:
Here's the updated chart with entries and stop loss zone.
Comment: It's important to note this is a educational/tutorial, not trading advice or analysis. All financial markets and particularly BTC are in a very tricky spot and the success/failure rates may not hold as much weight vs. "traditional" life as we knew it. Furthermore it could be argued that $10,500 is the lip resistance and that the gains and entry zone should be moved up to match that. That would make the current cup and handle right edge lower than the left which affects the profit expectations. Regardless this was a lesson on trading the cup and handle pattern, not an in depth analysis. I didn't put this through the full gauntlet of cup and handle criteria to come up with proper targets as I've sidelined myself until the market better presents itself.

Comments

Amazing work! Thank you for your time
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Thanks for your comprehensive analysis. I respect your approach
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Great job
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nice work
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Great job
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Regera Miketinkle
@Miketinkle, Thank you!
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Thank you
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Regera kennypilanski
@kennypilanski, My pleasure!
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Thank you! I've been waiting for your posts for ages)
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