Welcome to Lesson 12 of Forex Chart Formation Patterns. This lesson covers the inverse cup and handle pattern, a significant bearish continuation pattern used to identify ongoing downward trends in forex trading.
The inverse cup and handle pattern is a bearish chart formation that signals continuation of a prevailing downtrend. It starts with a broad, rounded upward retracement that forms the inverse "cup," followed by a smaller upward movement — the "handle" — near a key support level. This setup reflects a temporary pause before the market resumes its downward trend.
Typically, the inverse cup forms after a sharp drop, where the market retraces higher in a controlled, curved fashion. After the curve, the price retests support but slightly rallies before a decisive breakdown. This rally forms the handle.
The pattern highlights weakening bullish momentum and growing seller dominance. It's essential that volume contracts during the handle and expands on the breakout to validate the move.
How to Trade the Pattern
To trade inverse cup and handle pattern effectively:
- Wait for the price to break below the support level that defines the base of the handle.
- Enter a short position upon breakout.
- Use the height of the inverse cup (from the peak to the support line) as the projected profit target from the breakout point.
Stop-loss levels are typically placed above the handle to manage risk in case of a false breakout.
Final Thoughts
The inverse cup and handle pattern is one of the more reliable bearish continuation setups. It enables traders to spot continuation of a major downtrend, providing clear entry and exit levels.
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