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Inverted Cup and Handle Pattern for Beginners

Get info about the Inverted Cup and Handle pattern in trading, including its formation and trading strategies

 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?

Inverted Cup and Handle is a chart pattern known as a continuation of the bearish market trend. This pattern can sometimes also be the beginning of a downtrend. The Inverted Cup and Handle is just one of the chart formations in technical analysis that signals a price decline. When observed on the price chart, bears become more dominant in the market, and sellers increase, aiming to drive prices even lower. The Inverted Cup and Handle formation is mostly observed in a downtrend, but sometimes also at the end of an uptrend. In both cases, the downward trend may continue.

An illustration of Inverted Cup and Handle pattern
Inverse Cup and Handle Pattern

Formation of the Inverted Cup and Handle Pattern

The Inverted Cup and Handle pattern, in contrast to the Cup and Handle pattern, differs both in appearance and trend direction. Visually, it resembles a shape of inverted cup with a handle on the chart. In terms of price direction, while the Cup and Handle is a bullish continuation pattern, the Inverted Cup and Handle is known as a bearish continuation pattern. The following basic elements are involved in the formation of the Inverse Cup and Handle pattern:

Inverted Cup: Firstly, asset prices start to rise slowly, breaking away from a clear downtrend. Then, this upward movement weakens and stops. Subsequently, prices curve downward again with a shallow curve. During this process, a reversed "U" shape forms on the chart, completing the Inverted Cup formation.

Handle: On the right side of the Inverted Cup, there is a section where the price forms a handle by slightly fluctuating upward or downward. In this section, prices usually rise slightly and then experience a minor decline. This pullback forms the handle part of the pattern, which often occurs with lower volume.

In the formation of the Inverted Cup and Handle pattern, the support level encountered by prices during the downtrend is influential. During the first decline phase, prices can't break below this support level (neckline), forming the Inverted Cup. Similarly, during the second decline phase, prices fail to breach this support level (neckline) again, forming the handle. The handle can appear about one-third the length of the cup's depth.

How to Trade the Inverted Cup and Handle Pattern?

When an Inverted Cup and Handle pattern is seen, it is usually considered a bearish signal. Price movement below the neckline and breaking this level strengthen the expectation of a decline. It is preferable to sell when a breakout occurs at the support level below the handle area. 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 generally preferred to place a stop-loss order a few pips above the handle area or above the neckline.

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:

Trade example showing Inverted Cup and Handle pattern on 1-hour chart for Pound Sterling/Swiss Franc currency pair
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.

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