Across all the financial markets in the world, technical analysis gives an understanding of the price action and the strength of the buyers and sellers. Technical analysis involves chart patterns for identification, pattern analysis, strategy building, and back-testing. The Saucer pattern is a highly efficient tool for identifying significant bullish trend reversals.
In this article, we will understand the saucer Pattern, its structure, how to identify it, how to trade it with an example, its advantages, and disadvantages.
What is the Saucer Chart Pattern
The Saucer Pattern is a powerful chart pattern used by traders to identify the potential bullish reversals in an ongoing downward trend by forming a “U” shape curve.
The pattern is similar to the Rounding Bottom pattern, due to the curved bottom with smooth edges, rather than sharp peaks or drops.
The term “Saucer” refers to the structure of the pattern, which resembles a half circle or a tea saucer, where the price gradually declines, stabilises, and then rises again over time.
Structure:
- Saucer: A group of candles is formed in a rounded ‘U’-shape where the price of the security gradually declines over time, to the bottom, and then slowly begins to rise, and it closes at or near the opening price range of the pattern.
- Neckline: A horizontal line drawn by connecting the highs on the left and right sides of the Saucer pattern, and it acts as a strong resistance line during the pattern formation.
- Breakout candle: After the formation of the Saucer pattern, a strong bullish candle closes above the neckline, indicating a potential bullish reversal in an ongoing downtrend.
How to identify the Saucer pattern
First, identify a security in a downtrend and look for the price to consolidate slowly and rise back up, forming a bowl shape price action on the chart, then draw a flat trendline connecting the high of the candle from start to stop point, forming the Saucer pattern, with the sides should be smooth and about the same height.
After the consolidation, wait for the breakout candle to form, the candle that closes above the neckline of the Saucer pattern, followed by an increase in volume on the buying side for the breakout confirmation, indicating strong participation and reversal of the ongoing downtrend.
How to trade the Saucer chart pattern
Target Strategy:
Entry:
- When the candle breaks above the neckline resistance, enter a long position in the security at the close of that candle.
Stop-loss:
- The stop loss for the long position trade can be placed at the recent swing low or the low of the saucer pattern formed.
Target:
- Place the target by measuring the depth of the Saucer and projecting it upward from the breakout point.
Target Price = Breakout Level + Saucer Depth
- Or place your target at the next resistance level or based on your preferred risk-reward ratio, such as 1:1, 1:2, or higher.
Example:
The chart below shows an example of “Wipro Ltd” stock at a 1-hour timeframe from 21st to 24th November 2022. As you can see, the buy signal was generated by the Saucer pattern.
What are the advantages of the Saucer pattern
- The Saucer pattern provides a clear understanding of the price action and indicates clear entry, stop-loss, and target for everyone.
- The Saucer pattern is versatile and applicable across all timeframes and markets.
- The Saucer pattern acts as a strong support level after the breakout of the Neckline.
- While trading the Saucer pattern, the depth of the pattern helps in calculating target levels after a breakout.
The disadvantages of the Saucer pattern
- False breakouts can occur in a Saucer pattern, where the price may clear the neckline and then reverse, especially in choppy or low‑activity markets.
- By the time the Saucer pattern confirms, much of the move may have already happened, which affects your risk-reward ratio.
- The Saucer pattern often takes a long time to develop, especially on higher timeframes.
In Closing
In this article, we learned the Saucer pattern, its structure, how to identify it, how to trade it, along with an example, its advantages, and disadvantages.
The Saucer chart pattern is a powerful tool that signals the potential bullish reversal in the ongoing downtrend, indicating multiple opportunities for clear entry and exit signals.
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 financial market across the world, and as the Saucer chart pattern’s efficiency and accuracy increase rapidly when it is combined with additional indicators or tools (RSI, MACD, or others), and traders should backtest this pattern on various timeframes and instruments to better understand its strengths and limitations.
