Sunday, September 17, 2017

[FOREX TIP] The Cup and Handle Chart Pattern Analysis

The Cup and Handle Chart Pattern Analysis is one of the most widely recognized chart pattern. Perhaps the Cup and Handle pattern competes quite closely with the head and shoulders pattern. The Cup and Handle Chart Pattern usually takes a long time to evolve and can be used as a continuation pattern.

The cup and handle formation comes under the category of chart patterns and can signal powerful moves in the market when the pattern is correctly validated. The fact that the cup and handle pattern takes a long time to evolve makes it to visually stand out and thus garners more attention than usual.

The pattern can be formed across any timeframe, making it very versatile. It is also commonly occurring thus making this a very good chart pattern to keep an eye on. Given the structure of the cup and handle pattern, the risk/reward set up is also quite attractive.

Among the many types of chart patterns, the Cup and Handle Chart Pattern can be one of the best chart patterns to follow especially if you want to reap huge rewards. In this article, we take a look at the cup and handle pattern and also the basics of how it is formed and how to trade the cup and handle pattern.

How is the Cup and Handle Pattern formed?

As the name suggests, the cup and handle pattern stands out with the cup or the base that is formed. This is typically in the shape of a parabolic curve. Following the cup formation, price then starts to retrace into a channel, making the handle. Once the baseline of the up is breached following the breakout from the handle, price action is expected to move a minimum of the same distance as measured from the baseline to the low or high point in the cup.

The cup and handle can be bullish or bearish. The cup and handle pattern is bullish, while an inverted cup and handle pattern is bearish for the markets. The picture below, shows a well defined cup and handle pattern structure. The inverse of this makes it the bearish cup and handle pattern.

Figure 1 – Cup and Handle Pattern

Projecting Price with the Cup and Handle Chart Pattern

When the cup and handle pattern is formed, the first step is to wait for the pattern to be completed. Meaning that price needs to make the handle as well. By this time, you should be plotting the top of the cup and the bottom point of the cup. This distance is then either projected from the top of the cup or from the breakout level from the handle. This is the minimum projected move in the cup and handle pattern as shown in figure one above.

Figure 2 – Projecting Price with the Cup and Handle Chart Pattern

In the above example, (figure 2), we have a cup and handle pattern that was formed on the 60-minute chart. You can see how the cup was detected and the subsequent handle pattern that was formed. What’s unique about this cup and handle formation and the eventual target is that the measured move was projected from the breakout of the handle.

As you can see price rallied strongly and made it to the projected level to the tick before reversing later. What’s important to understand when trading the cup and handle pattern is that traders need to book profits regularly. Most often you can find that price rallies almost 2/3rd of the projected distance only to reverse those gains. Traders who hold on to the position could end up giving back all those gains.

Therefore, it is always ideal to have two target levels, the one which is projected from the handle breakout and the second target, projected from the top of cup.

Trading volume on the breakout

The cup and handle pattern occurs across all markets. For the markets where there is volume, you can also make note that volume typically increases at the breakout from the handle or the breakout of the top of the cup.

This surge in volume is ideal and serves as a confirmation of a breakout from the cup and handle pattern.

Trading rules and stop loss

The trading rules for the cup and handle pattern are quite simple. This is illustrated in Figure 3 below.

Figure 3 – Trading the Cup and handle pattern

The cup and handle pattern can be bought at the breakout of the handle. The first target is set to the first projection from the breakout level, and the second target is set to the next projection from the top of the cup. For stops, look for the recent swing low point in the handle. Once price breaks out above the top of the cup, move stops to breakeven. When the first target is reached, move your stops from break even to the top of the cup so you lock in some profits. The same rules apply for an inverse cup and handle pattern as well.

To conclude, the cup and handle pattern is a very powerful chart pattern but is very simplistic. The trading rules always ensure that your reward outweighs your risks. You can make significant profits by simply following this pattern alone. Given that the cup and handle pattern occurs in all timeframes and across all markets, this pattern alone can be used to make significant profits. There is some discretion involved, but the more you practice this chart pattern, the easier it can get.


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FOREX101: Psychological Challenges of Speculative Trading

A successful trader’s career mainly depends on his or her psychological stability in stressful situations, which are common in the process of trading. Theoretical knowledge can be acquired by reading professional literature; practical skills and experience are acquired in the process of actual trading. The most difficult process is adjusting psychological stress, because in real life it is impossible to completely eliminate the stress factor influencing human activity. Underestimating the stress factor could play a mean trick on traders and even completely block their abilities to make reasonable decisions in real trading situations. The psychological stress of those trading in the FOREX (and any other) market is extremely high. Traders must work under permanent psychological pressure, making decisions in highly unpredictable and uncertain market situations.

 Each trader goes through mistakes, failures, and losses in his or her own way, in accordance with his or her personality and temper. Some might blame their failures on the market’s “wrong behavior,” which didn’t comply with the trader’s brilliant forecast and caused the failure of the magnificently planned speculative combination. Others blame themselves and their own inabilities to make right decisions in situations, which afterwards seem to be simple. It is an interesting fact that, in hindsight, traders usually find the decision that should have been made at the lost critical moment and can reasonably prove their point of view. Why can they find the right decision so easily and quickly in hindsight? Was the trader unable to do so at the right moment? I don’t think it can be simply explained by looking at yesterday’s situation from today’s point of view. I do not think it can be explained by the fact that classical technical analysis allows for multiple explanations of almost any market situation. It is always possible to find an appropriate basic explanation for any market shift after the event takes place. In the heat of the moment, however, the trader was influenced by stress, and that stress caused the error. This is proven by the fact that most novice traders show exceptionally good (and even phenomenal) results trading dummy accounts but can’t even come near those results when trading with real money. 

Being permanently under stress, a trader can often make insufficiently considered, impulsive, and, therefore, wrong decisions that result in losses or premature liquidation of profitable positions, that is, in lost profit. Sometimes, after a few successive failures with various trades, traders becomes fearful of the market. They are in a state of psychological stupor, and even a simple market situation may cause panic. They cannot overcome their emotions or soberly evaluate the current situation, and they are unable to make any decision—reasonable or otherwise. In many cases when the market situation shifts against the trader’s position, they can only passively watch the growth of their losses, because they are unable to make any decision at all. Often, after the market stabilizes and traders have the opportunity to calmly analyze daily diagrams of currency fluctuations, they come to the conclusion that the main cause of failure was not the lack of knowledge or training but their own emotions. However, the situation cannot be reversed. Time has passed, money has been lost, and everything should be begun again.

 Another problem that causes severe and even catastrophic consequences is the trader’s wishful thinking. In this case, traders are sure that their forecast of market trends is solely correct. They feel the market cannot and should not give any surprises. They do not consider other options that could be helpful or they think of other options in a vague and uncertain form. Sometimes, traders consider a market shift against their position as short-term and temporary. They begin to average their positions. They acquire new contracts at a lower price in the hope that the market situation will come back, and all the positions will become highly profitable. Afterwards, as the situation worsens, they will be able to come out of the market without serious losses. Being sure they are right, traders lose the ability to critically evaluate the condition of the market and accordingly their own position in the market. In this case, they consider only those basic and technical features that justify their wishful thinking, and they discard the contradicting features. This wishful thinking costs them dearly and can lead to psychological frustration. The market’s “wrong behavior” not only deprives traders of a certain amount of money and often ruins their trading account, but also undermines their self-esteem and their hopes of being a winner in the trading battle.

After such a loss, traders blame themselves, repeatedly going through the details of the unsuccessful trade. They blame the market for the “wrong behavior” or themselves for errors in what then seems an absolutely clear situation. Sometimes, the trader-market relationship takes the form of a vendetta. Traders consider the market as their personal enemy, treat it in an unfriendly way (even with hate) and dream of immediate revenge. Doing so, they miss the fact that they are essentially blaming nature for changing sunny weather to rain. It is very important to be prepared beforehand for this change. Trades should always have close at hand one or a few options in case of sudden change of the situation/weather, so that their foresight assures their good time or good profit.

 The third main psychological problem is trader uncertainty, especially when traders are inexperienced in abilities and skills—specifically about each market position they hold. Immediately after each position is opened and a money contract is bought, traders start questioning their choices. This is revealed most vividly in the case of a moderately active market at the moment of fluctuations close to the opening price of the position. Any movement (even insignificant) against their position causes traders to have an irresistible desire to sell the recently acquired contract to limit losses, until it is too late and the market does not shift too far away from their position opening price. On the other hand, an insignificant market shift in the desirable direction causes the same desire to eliminate the position, until it provides for any (even tiny) profit and before this profit does not turn into losses. 

Scared and troubled traders rush and race about. They open and liquidate their positions too often, and experience many small losses and gains. Within a short period of time, they turn intermittently into bulls or bears. As a result, they suffer losses on a dealer’s spread and/or commissions when there were no significant market changes, and all the market fluctuations were no more than just regular market “noise.” Such losses are typical for beginners and individual traders with small investment capital or little experience and insufficient psychological preparation.

 Not uncommon are cases of traders’ impulsive decisions on trading, without any plans or serious preliminary market analysis. The position is opened under an impulsive, invalid emotional reaction. Often, it can be explained by traders’ fears of losing a brilliant opportunity to earn money they think is being offered by the market at that moment. I have witnessed these attempts to jump onto the last carriage of a departing train, and such attempts have ruined a lot of traders. Many traders cannot calmly watch any kind of market movements. Some of my students have confirmed this reality. If they have no positions at the moment of more or less significant market movement, they consider it as a lost opportunity to gain profit. This can inflict a serious shock to them.

When they have no position, they seem unable to realize that each market movement can be considered both ways, and the opposite situation can quite possibly develop. Statistics show that, at each market movement, the chances to lose are much higher than to profit. How does it happen that reasonable people (who in everyday life, without any emotion, can watch a bank cashier counting other people’s money) consider the fact of market movement as a threat to their own pockets? Why is other people’s money in the hands of a bank cashier not considered as a lost profit, whereas capital shift on the market and the corresponding quote fluctuations are the causes of negative emotions? I think the answer is in the illusory simplicity of business itself, which is considered by many people as a good and simple opportunity to earn a lot of easy money. Similar notions are widely spread among novice currency traders. The soon traders abandon such ideas, the sooner they become professionally efficient traders.

 The most difficult problem for every trader (regardless of their experiences) is to learn as quickly as possible how to recover quickly from losses, which are inevitable in this business. At the same time, they must learn to handle shocks and psychological damage inflicted by the losses, because these situations could negatively influence their future work.

 The losses themselves and the fear of losing, both of which permanently torture traders, negatively influence their ability to make reasonable decisions in a complicated situation. These factors also undermine traders’ ability to follow their own rules about trade strategies and systems.

 I have become personally acquainted with hundreds of traders and have watched their activities. I have taught many students, and have had my own experience as a trader at various steps of my career in the currency market. Therefore, I have come to the conclusion that the main causes of trader failures in speculative operations in the FOREX market are without a doubt those associated with psychological trauma—the inability to control their own emotions and to find an adequate way to fight stress.

 I have explored ways of solving the psychological problems that arise from operations in the FOREX market, with the focus on increasing selfresistance to stressful situations and increasing trade effectiveness. As a result of my research, I have managed to develop a trading method that also helps to withstand shocks and keep emotions under control. To solve the problem of stress, I had to separate the problem into several parts and solve them one by one.

 First, it was necessary to develop the philosophical conception of my attitude toward market situations. By this I mean not only the general trade methods, which are discussed in the second part of the course, but also my own conception of the market and associated psychological problems, which most traders (including myself) have to overcome daily. The  following formula is essential for my conception: I can’t be wrong if I don’t have an opinion.

 I had this in mind as I thought about how to avoid unwanted stress and emotions that are associated with trading. When you find a way to make reasonable decisions not based on your own opinion about future market trends but in accordance with certain market signals, the problem of diminishing and almost completely eliminating psychological pressure and stress will be solved. The key issue in this case is a philosophical attitude about market trends—they are natural phenomena beyond human control and forecast.

 The trick was to develop a secure and effective trade strategy that could advantageously use these natural phenomena. This formula seemed logical and could provide the basis for the development of a conceptual trading strategy. In reality, however, this job took considerable time. Nevertheless, the formula was used as a base for the development of my system- trade methods that I called the method of discrete-systematic trading.

 Moving from the basic formula and general philosophical idea through intermediate conclusions, I came to the development of the trade method. This method provides for trading practically without emotions, and it became a very effective and profitable tool to earning money in currency speculations.

The logical chain of my arguments and intermediate conclusions is the following:

  •  Idea 1. The main source of negative emotions and stresses is the unfulfilled trader’s forecast, based on the trader’s notion about market future trends. 
  •  Idea 2. To avoid unnecessary emotions and psychological pressure, it is better to completely abandon any notion about market future trends because this notion itself forms the forecast, which could be wrong. 
  •  Idea 3. The basic idea of the formula “I cannot be wrong if I don’t have an opinion” transfers the moral obligation for trading results from the trader to the market. Now, the fluctuation of the market can be considered as a manifestation of the so-called “God’s Will” or “Force of Nature,” so the trader cannot be responsible for that. 
  •  Idea 4. It is possible to abandon attempts to make forecasts and still have a profit only if one stops trying to foresee market trends but follows them instead. 
  •  Idea 5. It is possible to follow market fluctuations using only the system- trade method and developing a trading strategy providing effective monitoring of these fluctuations. 
  • Idea 6. One of the best methods of this approach could be the one providing the objective evaluation of the possibility of the market’s movements at any moment in both possible directions.

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