Hello Dear Readers. When trading in financial markets, one of the main truths I have learned through years of experience is the use of correct strategies. Correct strategies form the foundation of successful trading. In the face of ever-changing market conditions and uncertainties, trading without a strong strategy prevents us from achieving the desired outcome. Fortunately, technical analysis acts as a right-hand man in our financial trading. Chart formations in technical analysis are truly valuable tools for every trader. One of these chart formations is the "Inverted Cup and Handle" pattern.
What is the Inverted Cup and Handle Pattern?
The
Inverted Cup and Handle pattern is a technical chart formation that indicates a
continuation of a bearish trend in the market. Essentially, when this pattern forms on the chart, it shows that bears are becoming stronger and the price is expected to fall. Sometimes, it can even mark the beginning of
a new downtrend.
This
pattern gets its name because of the shape it forms on the chart. The "cup" part is upside-down, creating a rounded top that looks like an inverted "U," while the "handle" forms on the right side as a small pullback or consolidation
before the price breaks lower. Because the cup is inverted, some traders also
call it the "Inverse Cup and Handle", but both names refer to the same bearish
formation.
Inverse Cup and Handle Pattern
When the Inverted Cup and Handle is observed, it often appears in the middle of a downtrend, signaling that the downward movement is likely to continue. However, it can also show up at the end of an uptrend, warning that a reversal to a bearish trend may occur. In either case, the pattern highlights that bears are becoming more active in the market and that sellers are driving prices further down. When the pattern is observed, it provides early insights into where the market might head next. Traders can use this information to prepare for short trades or employ other strategies that take advantage of falling prices.
Formation of the Inverted Cup and Handle Pattern
The Inverted Cup and Handle pattern, unlike the classic Cup and Handle, differs both in its visual structure and market sentiment. While the traditional Cup and Handle pattern points to a bullish continuation with prices likely to move higher, the inverted version signals the opposite. It indicates a bearish continuation and suggests that the market may start drifting downward. On the chart, it looks like an upside-down cup followed by a short, corrective handle formation. Below are the main parts that make up this pattern:
Inverted Cup
The
first part of the pattern forms when the price of an asset begins to climb
modestly after a clear downtrend. This initial rise often creates a sense of
optimism among traders, giving the impression that the previous bearish phase
may be coming to an end. However, this upward movement is usually short-lived.
As
the price approaches a temporary resistance level, buying pressure weakens, and
the upward momentum fades. Gradually, sellers regain control, pushing the price
lower once again. This decline does not occur sharply at first. Instead, it
forms a smooth, rounded curve that resembles an inverted "U" shape on
the chart. This curvature forms the Inverted Cup portion of the pattern. It
reflects the market's slow shift from confidence to renewed selling activity.
Experienced traders often view this as an indication that the recent bullish
correction was merely a pause within a broader bearish trend.
Handle
Once the inverted cup is completed, the pattern develops its second part — the handle. Similarly, during the second decline phase, prices fail to breach this support level (neckline) again, forming the handle. This section appears on the right side of the inverted cup and represents a short period of consolidation or a minor corrective move before a likely breakout. The handle can appear about one-third the length of the cup's depth. During this phase, prices may slightly retrace upward or move sideways as short-term buyers attempt to regain control. However, these moves are usually weak and lack strong trading volume. Soon after, prices begin to dip again, completing the handle formation.
This
small upward or sideways movement, followed by a mild decline, gives the handle
its recognizable shape. Importantly, the handle usually forms with lighter
trading volume, signaling that bullish interest is fading. Once sellers take
over again, a downward breakout from the handle often confirms the continuation
of the larger bearish trend.
All in all, the Inverted Cup and Handle pattern illustrates how short-lived bullish attempts tend to fail within a dominant downtrend. Identifying this structure early allows traders to anticipate possible short-selling opportunities or bearish continuations in the forex market.
How to Trade the Inverted Cup and Handle Pattern
The
Inverted Cup and Handle pattern is a powerful bearish continuation signal that
all forex traders watch closely. When this pattern forms on the chart, it
indicates that a short-term bullish rally has failed and the market is likely
to resume its downward trend. Getting in front of this early gives traders a
clear lead in deciding where to place their profitable positions.
The
key level to watch is the neckline of the pattern. A clear break below this
support area confirms that sellers are in control and signals a higher
probability of continued price decline. Many professional traders wait for
price action to decisively close below the neckline before entering a short
position. This approach reduces the risk of false breakouts and ensures that
the trade aligns with the broader bearish trend.
The handle zone is also critical. Price often consolidates briefly in this area, forming minor fluctuations before the breakout. Observing volume trends here is essential, a declining volume during the handle formation often signals weakening buying pressure and strengthens the bearish bias. Confirming this signal with other technical indicators before going short will be more reliable.
- Entry: If the price breaks below the neckline and does not reverse, a sell position can be opened. Sometimes, the price may retest the broken neckline before reversing. In this case, a retest followed by a continued decline is expected, and a sell order can be placed.
- Stop Loss: When setting a stop loss level, it is sometimes preferred to place the order a few pips above the handle area or above the neckline. Placing a stop loss just above the top of the handle helps limit losses if the breakout fails.
- Target: In the Inverted Cup and Handle formation, the target price is determined by extending a line downwards from the neckline by the depth of the cup. For this process, the height of the inverted cup part of the formation is first measured. This height corresponds to the distance from the bottom level to the highest point of the cup. The measured height is then extended downwards from the neckline to determine the target price.
Take a look at an example of a trade with the Inverted Cup
and Handle pattern seen on the 1-hour chart for the Pound Sterling/Swiss Franc
currency pair below:
 |
| Inverted Cup and Handle on GBP/CHF chart |
Don't say "he didn't say": The Forex market is highly liquid, but it's not always possible to protect oneself from unexpected price fluctuations. Like any chart formation, the Inverted Cup and Handle pattern may not always provide accurate signals. Therefore, it's important to verify price movements using multiple confirmation methods in trading strategies and to prioritize risk management.