Technical analysis based on stock price charting is a method of identifying patterns to spot trading signals, according to Investopedia. The signals indicate times for buying and selling stocks.
The analysis is based on the statistical assumption that if a pattern in price movement of a stock has been seen many times in the past, it is likely to occur again in the future, explains Investopedia. Chartists distinguish between a reversal pattern and a continuation pattern. The price tends to reverse course following a reversal pattern, whereas it is expected to continue the trend after a continuation pattern is observed.
One of the most common patterns is the "head and shoulders," which is a reversal pattern, states Investopedia. The head and shoulders "top" pattern looks like the letter M, with the second peak, called the head, rising above the shoulders on either side. The stock price is expected to reverse and fall at the top of the head. The inverse head and shoulders is a "bottom" pattern that looks like the letter W, with the second dip, or head, being lower than the shoulders on either side. Here, the price is expected to reverse and increase at the lower dip.
A "cup and handle" is a continuation pattern in which, after a U shaped cup, the price pauses, making a shape like the handle, and then continues to rise. Other patterns include "double tops and bottoms," "triangles," "flag and pennant" and "wedge."