What Is Inverted Cup & Handle Chart Pattern?

A chart pattern occurs in response to the price movements of a crypto asset that may mirror a common shape like a rectangle, triangle, head and shoulders, etc. These chart patterns present the traders with a visual way to trade. Chart patterns provide traders with several advantages, including logical entry points, stop-loss points for better risk management, and other things that can be factored in for a profitable trade. 

One of these chart patterns is the cup and handle pattern. This pattern was first discussed in William O Neil’s book ‘How to make money in stocks.’ Like the conventional stock market, the cup and handle pattern is a significant chart pattern that crypto traders can use to their benefit by recognizing bullish price movements.

Another variation of this chart pattern is the inverted cup and handle pattern that signifies a bearish continuation and triggers a sell signal for the crypto traders. 

As the name suggests, this chart pattern also has two parts – a cup and a handle. The cup appears like an upside-down round-bottomed bowl. Once the cup pattern is complete, the trading range that forms on the right-hand side is the handle. 

Indicators in Inverted Cup and Handle Pattern and Their Working

Cup and handle patterns occur in long time frames, like a day, a week or a month, or short time frames, like one-minute charts. There are several indicators in the inverted cup and handle pattern:

Cup: The cup is usually U-shaped but a V-shaped cup may also classify as a cup. The upturned cup pattern has a rounding bottom typically having almost equal depths on both sides. The cup is formed when the price wave moves upward, followed by a stabilizing period which is then followed by downward movement of approximately the same size as that of the prior rally. 

The inverted U represents the ‘rolling over price action’, i.e., traders make every attempt for profit-taking in the bull market and the market, instead of rallying to a new high, goes into a distribution phase. The inverted top results from the sellers moving in and bidding the prices in the cryptocurrency market down. The right side of the cup forms when the prices start falling to meet the support level for the first time. 

Handle: When an uptrend occurs from the lower end of the cup, forming a rounding, triangular or ascending channel, a downward handle is formed. The inverted cup’s handle is opposite that of the regular cup and handle. The uptrend is usually 1/3rd the size of the prior decline. The pattern signals the end of an uptrend as the pattern breaks down out of the handle in the formation. 

When the prices start to break out and recover after touching the support level to reach new lows, the handle pattern is formed inside the trading range.   

Period: For monthly and weekly charts, the cup takes 3-6 months or longer to form, while the handle forms within 1-4 weeks or higher depending on the time taken by the cup.

Volume: Once the handle begins to take shape, the daily trading volumes witness a drop indicating that the handle formation is nearing completion.  

List of Things to Note in the Cup and Handle Pattern

Here’s a list of a few things significant to note in an inverted cup and handle chart pattern: 

• If the crypto market fails to go into a pullback or correction, the inverted cup and handle patterns are not considered good probability trades. 
• Inverted cup and handle patterns work best when they follow a price rally in the market. The pattern is more rewarding when it occurs in the trading range for a cryptocurrency witnessing declining sales but growing earnings. 
• Inverted U shapes are more successful in yielding results than V-shaped patterns. Look for classic U-shaped inverted cups. If you have to mentally argue into believing the shape is an inverted U, avoid considering it one. 
• This pattern has a greater rate of success when the breakdown of the handle is low or the support level of the bottom right-side of the cup happens on a day with a higher volume than the 10-day average volume of trading. 

Examples of Cup and Handle Pattern

Example 1: 

The chart above shows Bitcoin entering an inverted cup and handle formation on October 4, 2020. This pattern indicates a clear sign of the bearish phase. The pattern was predicted in a lower timeframe, and the downward move was limited to particular points. There are two opportunities for the traders here – one is from the bottom of the cup, and the second is after the minor rebound correction occurring in handle formation.   

Example 2: 

This inverted cup and handle pattern formed on an hourly timeframe was observed in BTC/USDT pair on December 10, 2021. 

How to Trade the Cup and Handle Chart Pattern

Since inverted cup and handle patterns indicate a bearish reversal, they signal traders to sell. Once the inverted handle starts retracing the initial move, start monitoring the trading volumes, which will witness a daily decline. Note in the diagram below the handle formation is accompanied by low trading volumes.    

The retracement is of a lower level than the original uptrend at the beginning of the inverted cup. The decreasing volume denotes the pattern is nearing an end. Traders can set the stop-loss here while they decide to sell the trend. Some potential trading strategies that crypto traders can employ for an inverted cup and handle pattern include:

• After the trading volume continues dropping for a few days, the trader may enter a short position.
• Once the trader is satisfied that the handle has retraced meaningfully, signalling the end of a bull period, they may enter a short position. 
• Traders can also use derivatives to spread trading bets in an inverted cup and handle pattern. 

Conclusion

Traders should remember that an inverted cup and handle chart pattern helps you get the best bets in going short when it occurs right after a clear uptrend. Derivatives trading with Delta Exchange  allows you to speculate on upward and downward price movements or go long and short without actually buying the asset and helping you hedge against market volatility. You can set up your Delta trading account in a few easy steps and start placing your bets as and when you recognize an inverted cup and handle chart pattern or, in the case of other kinds of chart patterns. 

FAQS

#1 How do you recognize an inverted cup and handle pattern? 

Ans: The cup and handle pattern is easy to recognize. Once you set your scanner to address other trading needs, you can look through the results and find a chart that resembles large crescent shapes followed by a less extreme uptrend. If the cup shape isn’t a classic U and you are in two minds, avoid putting any odds on the forming pattern.  

#2 When should we sell in case of an inverted cup and handle pattern?

Ans: In the case of an inverted cup and handle pattern, you should consider selling under two conditions. Once when you witness a daily drop in the volume for several days or when you find the partial retracement of the original uptrend complete signalling the end of the handle formation as well as the end of the bull run.  

Other factors that you can consider while setting a target include – uptrend or downtrend in a larger time frame and increasing or decreasing volatility. 

#3 Can we buy an inverted cup and handle pattern within the trading range?

Ans: Yes, you can buy when the cryptocurrency price makes a new low outside the bottom of the inverted cup. The buy point here is the short momentum signal. You need to enter a short position as soon as the price breaks down out of the handle pattern. You can also set up a stop-loss on the ascending trendline of the inverted handle. 

#4 How can we set a price target in an inverted cup and handle pattern?

Ans: You can set your price target to the downside anywhere between 20% to 50%. But the traders should be careful and note that the target can go lower further and can also rise back in price into the inverted handle and fail. 

#5 Why do we need stop-loss in an inverted cup and handle chart pattern? 

Ans: When the price moves out of the inverted cup and handle pattern, the price is expected to fall. This doesn’t mean the price can’t go up or move sideways. To hedge against all probabilities, a stop-loss order is needed. 

#6 Where should we place a stop-loss order in the chart pattern? 

Ans: The stop-loss order should be placed at the same time when you enter a short position. Setting the stop-loss at this position helps you limit your losses or ‘lock in’ any potential profits.