Tea cup forex pattern – is it tradable?

Tea cup Forex pattern is a reversal and continuation signal. Generally, it indicates the bullish continuation pattern encouraging investors to buy. In this article, we will overview this technical formation and see how traders can apply it in their trading strategies. 

Cup and handle pattern recognition

The tea cup and handle pattern (cup and handle pattern) consists of two approximately rounded hollows.

A tea cup and handle formation is an indicator occurring when the chart takes a U-shape with one horizontal line drifting downward.

The lowest of the cup should be less than 50% of the previous movement and the lowest of the handle should be less than 50% of the height of the cup. The highs in the pattern can be aligned with a horizontal resistance line. 

The exit is validated when this resistance level is broken and in 74% of cases, it is preceded by a pull-back. 

The cup with handle is considered by forex traders as a continuation chart pattern in 79% of cases. It most often appears following a rise in forex prices.

It’s a rarer pattern and perhaps less known structure: the cup with handle. It was described for the first time by the American investor William J. O’Neil, in his famous book “How to Make Money in Stocks” published in 1988.

This particular shape is composed of two phases of consolidation, of two troughs, the first being more important than the second. The tops of the cup and the handle are more or less aligned with the same zone of resistance, also called the “neck line” as for the shoulder-head-shoulder.

Tea cup Forex as a bullish indicator – buyers on the lookout

This is generally a so-called bullish continuation pattern. In other words, it suggests a gradual takeover of the trend by buyers. The cup is in fact the result of a first wave of profit after the price moves up. A short rebound follows, fueled by long-term investors who see the first dip as a buying opportunity.

If the rise is halted a second time, the strength of the sellers wanes. This can be seen, in particular, in the trading volumes which are gradually drying up.

Buyers then take the opportunity to lead the trend again. The rise is accompanied by strong trading volumes, once the neck line is crossed. According to some, the price target can be calculated by plotting the height of the cup at the breakout point. Others, perhaps more cautious, however recommend deferring only half of it.

How to read the tea cup forex pattern 

The tea cup forex pattern is one of the reversal patterns, in which the trend is slowly reversed with the creation of a characterized trough. It is therefore the opposite of the V inversion, very dynamic and fast. 

Typically, this pattern has a bullish implication, so it will be explained accordingly below. This pattern is mostly seen on long-term charts, although it can occasionally appear on short-term charts. In a cup and handle pattern, the trend traces the outline of a cup with a handle just to the right.

Tea cup pattern use case

The first thing that stands out is the uptrend, which is undergoing a downward correction from the all-time high. This correction is quite dynamic in the first few weeks, but then loses momentum.

This almost leads to a sideways phase, although lower lows (in the direction of the downward correction) are still forming. However, the lows also rise again and the sellers no longer manage to exert enough pressure to push the price down further and thus reconfirm the downtrend (with a new low).

In the next phase, the “side phase” is broken on the upside and a higher high is inevitably formed. Higher lows also appear, and a secondary uptrend forms. However, the upper upward trend is confirmed again only when the historical high is exceeded.

Once the price has again reached the last peak of the trend, the “loop” is formed. Normally, this is a flag, which takes the form of a brief consolidation before the price continues to move in the direction of the prevailing trend.

The first selling move mirrors the left side of the cup. 

The bottom is rounded with initially lower hollows, which stagnate to no longer exceed the lowest hollow of the movement and which gradually rise forming the typical rounding of the bottom of the cup. This is followed by a strong bullish move which represents the right side of the cup. 

If the price has returned to where it was before the sale, the edges of the cup are the same height on both sides and the handle can be formed. This corresponds to the. the brief consolidation.

Tea cup Forex – A few rules to follow

To be validated, this pattern must meet many conditions. It must, first, be preceded by a significant upward movement (a jump greater than 10%) spread over several sessions.

Concerning the shape strictly speaking of the cup with handle, many insist on the fact that the first hollow has a nice rounded shape like a U, without too sudden movements (whether at up or down). A V-shape would then signify a false signal and invalidate the figure.

The floor of this first trough must, moreover, be less than 50% of the rise preceding the formation of the pattern. As for the handle, it must always be to the right of the figure and it cannot represent more than half of the cup.

How to use the pattern tea cup in Forex – breakout trading

The pattern being progressive, it is difficult to define an exact entry point. If there is a clearly recognizable sideways phase at the bottom, which is also supported by volume, then the uptrend reversal can be used to enter. If the price breaks higher and a higher high is formed, the trend reversal has probably already taken place and it will be possible to take advantage of the following price increases.

This can be done either with a buy stop order, in order to enter the position as soon as the break out of the zone, or with a buy limit order. The latter is placed on the upper edge of the zone after the breakout has taken place; we are therefore betting on a new test of this support.

The second, safer option is to wait until the old trend top is reached again. If the flag is then formed, it is possible to trade the breakout from it, but this involves missing a large part of the upside move. 

However, with the upward trend being confirmed, it is also possible to follow this trend and, as long as it is not reversed, count on a further rise in prices.

The importance of trading volumes 

Typically, a sell trend is accompanied by an increase in volume. For the prevailing trend, the less volume in the correction (i.e. selling), the better. As the cup with handle pattern represents a long and steep trough, it is particularly important that high volume was traded during this time frame. A solid bottom is usually supported by a large volume.

Tea cup Forex pattern – Summary

The cup and handle pattern is generally seen as a U-shaped dip with an accompanying downward-trending horizontal line, resembling a teacup. This is a bullish sign, meaning that once it is completed, the price of the asset may increase. It can take a while to form, and traders use it to identify chances to buy a security that they think will go up in price. However, it is not a guarantee that the price will rise, so it is important to use a stop-loss to manage risk.

Tea cup Forex pattern frequently asked questions FAQ

What does the tea cup pattern represent?

Tea cup or tea and handle forex pattern is a bullish signal showing the rising prices in the market. It showcases the confident investor sentiment enticing investors to buy. Traders should therefore place their stop buy above the upper trendline of the handle 

Is teacup Forex pattern reversal pattern?

It can be both a reversal or continuation signal. Reversal happens when the price of the asset is on the downtrend in the long run forming the cup with the handle but the price is starting to go up.

What are the buy points for the tea cup pattern?

This pattern can range from one to six months or longer. Generally, the handle is formed over up to four weeks. The buy points occur once the price breaks or goes up against the previous resistance point. This breakout happens when there are increased trading volumes.

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