When selecting stocks, fundamental analysis is important, but technical analysis is of equal or greater importance. Stocks trade based on what the future holds (or is expected to hold), not on last quarter’s financial results. A stock’s share price reflects the future prospects of and expectations for the company.

But stocks also have memories. The stock market is simply a collection of investors who buy and sell stocks. These investors remember a stock’s past, which influences their buying and selling behavior.

This is where the technical analysis of stock trends comes into play. It can be a powerful tool to identify trend reversals and entry and exit points. The best way to analyze the trading pattern of a stock is to look at its chart.

As you read Cabot newsletters and listen to investing news, you will probably hear terms like ‘head-and-shoulders pattern,’ ‘trendline,’ ‘support and resistance,’ ‘double top’ or ‘double bottom,’ “triangle,’ and ‘gap.’

Understanding these basic formations and how to read stock charts will make you a better, more profitable investor. Timing is everything, and even a basic understanding of technical analysis will greatly improve the timing of your entry and exit points. And that can be the difference between a successful and a failed investment.

No technical indicator or system is perfect. There will be times when the signal that is given by the charts turns out to be wrong. But in most cases, when technical stock analysis leads you to a certain conclusion, the stock will behave in a way that is similar to what would be expected.