If your trading is based on technical analysis, then you are likely to come across powerful indicators and tools, like chart patterns and many others. In this article, we will explore the Inverted Cup and Handle pattern, which is used to indicate the bearish continuation of the present downtrend and spot clear entry and exit points.
In this article, we will understand the Inverted Cup and Handle chart Pattern, its structure, how to identify it, how to trade it with an example, its advantages, and disadvantages.
What is the Inverted Cup and Handle chart Pattern?
The Inverted Cup and Handle chart pattern indicates the bearish continuation after the breakdown of the consolidation in the pattern, the price over a period, followed by a breakdown to lower prices, indicating the continuation of a strong downtrend ahead, and it is formed in an ongoing downtrend.
The term “Inverted cup and handle” refers to the structure of the pattern, as it resembles the shape of the cup and handle in the Inverted direction.
Structure
- Inverted Cup: An upside-down ‘U’-shaped pattern is formed where the price gradually rises and then falls back to the previous low, and it closes near its original level.
- Handle: As the price reaches the previous low, the price pushes slightly up, forming a small consolidation or an upward channel resembling the “Handle” shape of the cup upside down.
- Rim: A trendline drawn by connecting the lows on the price chart, and it acts as a strong support line in the pattern.
- Breakdown: The candle is formed below the support level. After the formation of the Inverted cup and handle pattern is completed, it signals a potential bearish move.
How to identify the Inverted Cup and Handle chart pattern?
Identify a security trading in a downtrend and wait for the price to consolidate slowly and rise and fall, forming an upside-down “U” shape price action on the chart. The sides of the cup should be smooth and about the same height.
After the consolidation, watch for the handle formation. After reaching the low, the price pushes slightly up, and this consolidation is smaller and looks like a short pause, then look for a breakdown candle as the price closes below the rim of the cup, followed by an increase in volume on the selling side, indicating strong participation and continuation of the ongoing downtrend.
How to trade the Inverted Cup and Handle chart pattern?
Sell Signal:
Entry:
- Plan a short trade on the following candle that closes below the rim of the pattern.
Stop-loss:
- The stop loss for the trade can be placed at the high of the handle of the pattern formed.
Target:
- Place the target by measuring the depth of the cup and adding it to the breakdown point.
Target Price = Breakdown Level – Depth of the Cup
- Or place your target based on a preferred risk-reward ratio, such as 1:1, 1:2, or higher.
Example:
The chart below shows an example of “RIL Ltd” stock at a 1-hour timeframe from 3rd to 11th February 2025. As you can see, the sell signal was generated by the Inverted Cup and Handle chart pattern.
What are the advantages of the Inverted Cup and Handle chart pattern?
- The Inverted Cup and Handle pattern provides a clear understanding of the price action and indicates clear entry, stop-loss, and target for everyone.
- The Inverted Cup and Handle is versatile across all timeframes and all other stock markets, as a single strategy, can be applicable for all markets.
- The Inverted Cup and Handle pattern “Rim” acts as a strong resistance level after the breakout of the pattern.
- While trading the Inverted Cup and Handle pattern, the depth of the pattern helps in calculating target levels after a breakdown.
The disadvantages of the Inverted Cup and Handle chart pattern
- False breakdown can occur in an Inverted Cup and Handle pattern, and the price can quickly reverse again, especially in low-volume or sideways market conditions.
- By the time the Inverted Cup and Handle confirms, much of the move may have already happened, which affects your risk-reward ratio.
- The Inverted Cup and Handle often takes a long time to develop, especially on higher timeframes.
In Closing
In the above article, we explored the Inverted Cup and Handle chart pattern, its structure, how to identify it, how to trade it, along with an example, its advantages, and disadvantages.
The Inverted Cup and Handle chart pattern is a powerful tool that signals bearish continuation in the ongoing downtrend, indicating multiple opportunities for clear entry and exit signals for everyone, and as the Inverted Cup and Handle chart pattern’s efficiency and accuracy increase rapidly when it is combined with additional indicators or tools (RSI, MACD, or others).
Your profitability depends on your approach to the trade, your risk management, and your mindset when you are holding the trade, as no indicator or tool is 100% accurate in the securities market in the world.
