When a coin enters the market, usually after an ICO the most commonly seen chart pattern formed is a cup and handle. Here are some examples:
Kyber Network (KNC)
The formation can be found on the majority of the coin especially those that were launched by an initial coin offering (ICO), on higher time frames and on smaller as well.
The question imposes – why is that. In order to answer this question, we need to understand the story behind this formation. This formation is common because people’s approach to the market is similar. Participants are governed with greed and fear, and that is all imprinted into the price action.
Cup and Handle
After the initial uplift of the price people who purchased coins during the ICO already made significant gains and they are now turning into sellers. With no new buyers coming into play because this is a coin newly introduced to the market and people willing to buy it already did it during an ICO, the initial sell-off starts.
Seeing how they could have sold their coin for a greater profit, those who haven’t, are waiting for another opportunity (greed). With no new buyers coming into the market, price only continues to decline, and those who are aware of this are starting to get off the wagon. Those who aren’t are still waiting for the price to bounce back. That’s what’s forming the U shape of the formation, steadily one by one market participants are selling their assets (fear).
The bottom of the formation is supported by the holders who’ve bought during an ICO and are long term believers and are willing to hold their coins no matter what and for a long period of time. Those are the period of low volatility.
Having seen that the price was found its support, new savvy buyers are entering the market. (accumulation stage of the market cycle). New buyers are pushing the price to go slightly higher, which grabs the attention of other investors, who are now pushing the price even further (markup stage).
After that happens the price rose to the levels of old highs, and those who were hesitant to sell before are now not willing to miss another opportunity. The selling pressure from those investors who bought at those level or didn’t sell at those levels occurs. That selling pressure is making the price consolidate in a downtrend for a period of time, and that’s why handle pattern is formed.
This is where things get interesting. The cup and handle is known as a trend continuation pattern. In other words if the pattern is found in an uptrend the price is expected to go up, and vice versa. Most commonly advised trading strategy is to buy (or sell) after the breakout happens. And that’s ok, you have to be sure and have a confirmation of the direction. But glance back to the chart of EOS.
If you were to have bought at the bottom and sold at the top of the handle your potential profit would be 106,64% versus at you were to have bought at the breakout you would have made 27,12% gain.
One key lesson I’ve learned trading forex in the past is – if you buy the breakout you already too late. That’s why you need to understand chart patterns and price action (supply and demand) so that you can anticipate the breakout and buy early enough in order not to get emotional and indecisive during the mania and high volatility.
Don’t buy into the hype, anticipate it.
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