Cup and handle patterns are very distinguishable and can be identified by their beginning saucer like patterns and following handles.
It can take one to six months for the “cup” to fully develop followed by one to four weeks for the “handle” pattern. Due to the amount of time it takes for this pattern to develop, once all typical characteristics of a cup and handle pattern are identified, the result can be a bullish breakout.
Below, you can see a chart of the EUR|USD foreign currency pair in a cup and handle trading pattern:
Trading the Handle
The handle acts like a coiled spring in that volume decreases substantially and then returns with velocity once it is fully developed. Looking at a volume or (VOL) day trading indicator, the decrease in volume can act as a signal to ‘buy the dip’. This trade could be implemented by programming an automated trading indicator or an advanced trade management (ATM) strategy on your trading platform to buy once volume decreases by a specific percentage.
Trading the Breakout Reversal: An Exit Strategy
If buying the handle on low volume, an exit strategy could be programmed on your trading platform simultaneously. By programming a sell order with automated trading software to trigger once the breakout reversal retraces more than X% (whatever % you are comfortable with), you have a clear exit strategy in place.
Once your automated trade closes the position, you can potentially enter a new short position and exit once the breakout retracement nears the ‘lip’ level of the already formed cup.
It is important to note that implementing this and other trades mentioned are purely speculative and trading contains substantial risk.