What Is Inverted Cup and Handle Pattern?

Once the chart pattern has appeared, the asset starts to move in a specific direction by creating a unique shape in the "U" pattern. And this shape is known as the cup and handle pattern.

This pattern is known as an inverted cup and handle because it resembles the actual cup and handle in the "U" shape. However, it has a handle that is leaning down.

Cup and handle patterns can be analyzed in all financial markets. A cup and handle formation is created when an asset's price drops but rises again to where it started.

From intraday charts to weekly and monthly charts, cups and handles are found on all timeframes.

What is the inverted cup and handle pattern all about?

An inverted Cup-and-Handle pattern takes place when prices start to rise and decline in a trading market. It appears in a "U" shape in the numerical representation of 1, 2, and 3, often referred to as the cup.

The 3 and 4 sides of the pattern create a right lip that indicates when the price increases. As a result, an 'inverted cup and handle' chart shows a sell signal indicating bearish continuation. It looks like an upside-down cup and handle.

As you look at any regular cup and handle pattern, you will notice a "U" shape with a downward handle followed by a bullish continuation.

What is the structure of the cup and handle pattern?

This pattern is called Cup and Handle because it resembles a cup on a chart. Price decreases start the pattern, followed by a change in direction.

As a result of the gradual change in price, the chart shows an inverted bottom. The same price level was reached at the beginning of the decline and the end of the increase. The rounded portion of the pattern is the cup.

Lastly, we have the handle, which represents a bearish price movement. On the chart, the handle often resides within a smaller bearish channel.

The cup and handle are the shapes of the pattern. In some cases, the beginning of a decrease and the end of an increase may not fall at the same level. There may, however, be a small difference between the peaks of both trend lines.

The handle should reach the midpoint of the Cup and Handle pattern. There may be a slight decrease before the midpoint, or there may be a slight decrease below.

How does the cup and handle pattern work?

Stock prices drop as investors sell their shares after the initial run-up of the pattern. It is the drop in price that produces the cup's left side.

Once they leave, the stock can consolidate to form its base until it runs again. Investors and traders shift from selling shares to rebuying them when they stop selling. This raises the stock price.

Upon completing the cup, the right side develops a trading range - which forms the handle.

How is it possible to identify a cup and handle a pattern?

An upward trend is entirely followed by a downward trend where it forms a cup and handle pattern. Upon rallying, the price returns to where it started falling, creating a "U" or cup shape.

This price range becomes the handle of the cup, which is less than one-third of its size. There can be a horizontal or angled pattern, as well as triangle or wedge patterns.

Once the pattern is complete, it may take a long trade when the price breaks above the handle. Some traders, however, assume that if a U-shaped pattern forms, the price will immediately drop to form a handle.

Trading patterns may not form ultimately, so you should avoid trading them until the trend has been confirmed. To continue the uptrend, you need to wait for the price to break above the handle. We call this a bullish continuation pattern.

Essential indicators to consider when choosing cup and handle pattern

When a stock forms this pattern and reaches previous highs, it will experience selling pressure from investors who bought the stock at those levels earlier. After three days to five weeks, selling pressure will likely cause the price to consolidate with a tendency to move downward before it goes upward. 

Traders always look for opportunities to start buying when they find a cup and handle pattern, seen as a bullish continuation. While choosing a pattern of cup and handle, it is essential to consider a few factors discussed below: Let's have a look

• Length: A cup with a longer bottom and a more U-shaped generally gives a better signal. It will help if you avoid the cup with sharp V-shaped bottoms.

• Depth: The depth of a cut should not be excessive. Too deep handles should also be avoided. Afterward, a handle is then formed within the upper half of the cup.

• Volume: As prices drop, the volume should decrease and remain less than average at the bowls' bottom. It will then increase as the stock rises again to test the former high of the bowl.

Three ways to start trading with cup and handle patterns

1. Recognizing cup and handle patterns

You should look at both the shape of the cup and the handle when evaluating whether a cup and handle pattern is real.

Rather than a V-shaped cup, it should be U-shaped, as a gentle pullback from a high indicates consolidation rather than a sharp reversal.

Likewise, the U-shape indicates strong support at the base of the cup, and the cup depth retraced less than 1/3 of the advance before the consolidation pulled back.

The cup depth can range between 1/3 and ½ of the previous advance in volatile markets and can even retrace 2/3 of the prior advance in extreme setups.

Daily charts can show the cup developing over one to six months or even longer if they are weekly charts.

The highs on the left and right sides will be at roughly the same price level in an ideal cup, indicating a single resistance level. Bear flags and pennants are also good handles. Minor, unorganized pullbacks can also be used.

Ideally, the handle should be completed within less than a month on a daily chart, but it can take up to several months.

2. Breakout

Breaking above the upper trend line of the handle is a bullish breakout, signaling the continuation of the prior bullish trend. Under the right side of the cup, there is a resistance line.

To confirm the breakout, it should occur on high trading volume and continue above the trend line drawn from the left side to the right side of the cup.

The handle should not be broken until and unless it breaks above the left side of the pattern cup unless the right side of the cup is well below the left side.

3. Trading Strategies

Stop buy orders can be set up to automatically trade an above-the-handle breakout above the upper trendline or a breakout above the right side of the cup. The extent of the bullish movement can be estimated once an entry is made.

To do this, the price at the breakout point is adjusted by adding the price difference between the bottom of the cup and the breakout level above the handle's upper trend line.

How can you use a cup and handle pattern?

By using the cup and handle pattern, traders can effectively flush weak holders out of the system.

Traders should wait for resistance levels to break before the trading cup and handle patterns. Buyers can purchase the break of resistance in two different areas.

The first step is to draw a resistance line, including the high prices of the handle. If the trend line breaks, it indicates a buy signal. If the handle breaks above the high, a buying opportunity is presented.

You should wait for the handle's high to be broken before taking a risky position because you are waiting for confirmation from the market that the price has hit new highs.

Traders will set their stop loss and risk at the low of the handle. Thus, you will be able to close out the trade at a loss if the breakout fails and the price falls back below the handle's low.

In the event of a breakout, you may wish to move your stop loss to break level, locking in the trade without suffering a loss.

The optimum risk-to-reward ratio is determined by the distance between the cup and handle.

Cup and handle patterns are thus relatively simple to design. First, calculate the distance from the cup high to the cup low, project that similar distance starting at the low point of the handle. In this scenario, as long as the handle remains at the top of the cup, the risk-to-reward ratio on the trade is favorable.

How can you trade with a cup and handle chart patterns in a crypto market?

Cup and Handle chart patterns are known to be bullish continuation patterns. This means that an ideal entry price level occurs when price action breaks above the cup's brim. The bullish trend seems to be extending beyond the previous high before the cup was formed. 

Be sure to wait until the cup has formed a handle. This is the best place to start. Once the pullback from the handle has failed, it is appropriate to enter without any delay.

If the Cup and Handle pattern appears inverted, you can short the market. An Inverted cup and handle chart pattern allows you to sell when a breakout occurs below the cup's low or when the handle breaks off.

Inverse cup and handle chart patterns indicate that crypto asset prices are about to continue down after a brief pause in the bearish momentum. Furthermore, we see that this pattern formed after a period of consolidation.

A time like this requires us to observe the market patiently before making any quick decisions. The pattern formation of an inverse Cup and Handle was validated after a prolonged conflict between buyers and sellers.

Cup and handle patterns: are they bullish or bearish patterns?

In typical bullish continuation patterns, a cup and handle are seen. Nevertheless, after a cup and handle are created, it is more important to watch how the price moves to determine whether the price action will be bullish or upward. 

It is not necessarily bearish if the handle drops below the handle. For example, if the price drops slightly, it might bounce back up again, forming a new handle or breaking above the first handle. 

Besides the inverted or the reverse cup and handle, there is also an upside-down cup and handle pattern. In this entire bearish pattern, the cup and handle are somehow different from traditional patterns.

What are the advantages & limitations of cup and handle pattern?

Undoubtedly, the cup and handle pattern is known to be the most accurate and reliable chart pattern in trading. But it does have some individual weaknesses or strengths which you should know about.

Before you make any trading decision based on this pattern, it is essential to identify the weaknesses and strengths for achieving better results. So let's dive into discussing significant advantages and the limitations of trading with a Cup and Handle pattern.

Advantages

Below you will catch some essential advantages related to Cup and Handle pattern:

• Various markets can use it. Among them are stocks, foreign exchange, cryptocurrencies, etc.

• Trading levels are clearly defined and relatively objective for trade entry and the stop-loss and the take-profit levels.

• Traders who have experience can easily identify and implement this pattern into their strategy.

Limitations

• There is no such specific period when this pattern occurs. Therefore, it's not clear how long this pattern would take to develop. It could probably take days, weeks, or even long months.

• "False Cups and Handles" are signals that provide traders with misleading information.

• Even though the Handle pattern, in principle, incites you to anticipate an uptrend, it does not guarantee that it will occur.

• A novice trader may have difficulty identifying this pattern.

Important tips to follow to trade with cup and handle pattern

Investors must wait for a handle to form before they can use the cup-and-handle pattern successfully. It takes patience and a rational approach to trade off this pattern, which many investors find difficult. 

The pattern is almost complete once the stock has recovered and turned down or stabilized slightly. Investing experts anticipate that it will remain stable for a few months before resuming growth.

As a result, the handle on a cup and handle is a good indicator of how a stock is likely to grow. The decline in share price, however, can be interpreted in many ways. So we won't simply be seeing the formation of a handle.

A falling asset price cannot be distinguished from the beginning of an eventual rally of a stock.

If you are fortunate enough to get in at the bottom of the cup, you will most likely make more money than if you wait until the handle, but you may also predict a recovery that never materializes.

Stock market trading patterns such as the cup-and-handle pattern are when a share loses value, regains it, and then briefly stabilizes or even slightly declines before recovering.

Using it can identify shares that might be poised for growth if you identify them early enough.

The cup-and-handle pattern can be a valuable part of an overall trading strategy, but it should be just one part – albeit a relatively risky part – of a trading strategy.

It can serve as a valuable component of an overall trading strategy but should be viewed as only one part - although a reasonably risky part - of a trading strategy.

FAQs

1. How bullish is the pattern of the inverted cup and handle?

Cup and Handle patterns are continuation patterns that mark the beginning of a consolidation phase and the breakout. But inverted Cup and Handle patterns are continuation patterns that show the fear of a bear market.

2. What will happen after the inverted cup and handle?

As soon as the price crosses above the line of pivot price in the reversed inverted cup-with-handle trade, the trader can eventually buy-in.

3. Is it possible to form a cup and handle it in a day?

This formation is seen over a long period, sometimes as long as a year and many sub-trends usually accompany it. Thus, day traders will probably be more concerned with the changes occurring day-to-day than the underlying trend.

4. Does the cup and handle pattern apply to crypto?

This is a technical indicator found on cryptocurrency price charts. A correction of an earlier uptrend signals the resumption of the trend. Because of the fragmented volume metrics, this trading pattern displays clearly defined entry or risk levels in the crypto markets.

5. How do cup and handle become a reverse pattern?

An upside-down cup is followed by an upside-down handle and a downside breakout in a reverse cup and handle pattern. Such a pattern represents a continuation of bearish market conditions. The pattern consists of a drop, a rally, and a drop back down to the rally's start.

Bottom line

To end the discussion, it is clear that the cup and handle pattern is one of the primary keys to bullish continuation. In addition, this pattern plays a significant role in identifying buying opportunities.

Follow the upcoming price movements on a trading chart and look for a "U" shape and a downward handle to identify the cup and handle.

Few limitations are also connected with cup and handle pattern, including length, time frame depth, or underlying the asset's liquidity.