By Orbex – FX traders that can’t identify candle formations or candlestick patterns, fail to understand price action.

Of course, there are many candles formations and patterns to learn. However, there are only a few that carry as high an accuracy rate as the Cup & Handle pattern does.

The Cup and Handle Pattern is one of the rarest patterns traders can spot. It is also one of the highest probability patterns, and forex traders shouldn’t ignore it!

Once spotted, due to its very rare occurrence, it provides one of the best FX trading opportunities.

What Are The Characteristics Of A C&H Pattern

Just like the name suggests, a completed pattern looks like a cup, with a handle. It is a trend continuation pattern and its formation starts when prices register a fresh high.

The characteristic of its formation and visibility are as follows.

The Cup

Swing high: After price finds a temporary top, it starts to fall sharply in a short amount of time.

Retracement low: The price then retraces lower and forms a fresh bottom, where it’s expected to somewhat stabilize.

Revisiting swing high: After consolidating in a tight range, the price starts to trend back higher. This rally up north more or less mirrors the pace and proportion of the initial decline. However, it’s not necessarily forming a double top. The price ends up reaching at or around the initial peak high prior to the decline.

This whole price movement depicts an easily spotted cup on the charts.

The Handle marking top: After marking the second swing high, price starts to fall to the downside. However, in the handle formation, the range and duration of the drop are limited when compared to the Cup. While falling, it puts in a pattern that resembles the bull flag pattern.

Sloping decline: The downward biased price action should not weaken lower than a third of the Cup’s range. The quicker the bull flag formation is done, the stronger the breakout is likely to be on the upside. In case of price action weakening more than 50% of the Cup’s range, then the accuracy of the C&H pattern wears off.

Ways To Trade The Cup & Handle

There are 2 key ways to trade the Cup & Handle Pattern; aggressively or conservatively.

Aggressive FX traders take positions following an immediate handle breakout, or when the bull flag becomes vividly visible.

There is, of course, a downfall when trading aggressively. Usually, these turn out to be false breaks, so the impending breakout turns out to be just a triple top; a failed attempt to move beyond the top of the C&H pattern.

Conservative forex traders, on the other hand, wait for a valid breakout before entering into a trade. This means the trade should be taken at least following a successful candle close. Of course, there are more conservative traders who would not only wait for a successful candle close but also wait for a retest.

Tips You Should Not Ignore

The largest time frames like the daily or the weekly work best for the C&H pattern. This, of course, is valid for all assets, patterns or formations.

Larger time frames are more fruitful when trading C&H pattern in particular because when identified, the trend can continue for long periods of time. However, this will also depend on the signs of strength the initial breakout registered.

Now, when adding that market observers suggest that the majority of the C&H patterns are formed in the stock markets, you have to allocate a good amount of time ahead in order to look at your charts.

By Orbex