A cup and handle pattern is a common chart pattern formation for both individual stocks and stock indices. It occurs when the price falls from a high point but then gradually recovers to that level. It does not need to be an all-time high, it can be a 52-week high or any other high point that looks significant on the chart. This forms the cup.
Once the share price is near the prior high, if the price swings start to get smaller and smaller, this means that the size of the price movement is contracting. You can draw trendlines on the swing highs and lows of these price swings, in order to see the handle of the cup, using the drawing tools on our advanced online trading platform. When the price moves above the upper trendline of the cup, traders may consider buying.
A stop-loss can be placed placed below the handle, and you can estimate the target to get out at by taking the approximate height of the cup added to the handle breakout point. In the case of the Apple chart example below, the entry is near $325. From analysing the cup, we can see that it is approximately $110 in height. Added to the breakout point, this gives a target of $435.