The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

the hAnDbook of teChnICAl AnAlysIs

Technical analysis is the science of recording, usually in graphic form, the

actual history of trading... then deducing from that pictured history the

probable future trend.

Edwards and Magee, Technical Analysis of Stock Trends

(AMACOM, 2007)

Notice that the last two definitions specifically refer to the forecasting of trend
action.
It is interesting at this point to draw a parallel here with information used in fun-
damental analysis. Technical analysis is often criticized for the use of past information
as a basis for forecasting future price action, relying on the notion that certain price
behaviors tend to repeat. Unfortunately virtually all forms of forecasting are based
on the use of prior or past information, which certainly includes statistical‐, funda-
mental‐, and behavior‐based forecasting. Companies employ accounting data from
the most recent and even past quarters as a basis for gauging the current value of a
stock. In statistics, regression‐line analysis requires the sampling of past data in order
to predict probable future values. Even in behavioral finance, the quantitative measure
of the market participant’s past actions form the basis for predicting future behavior.
The following definition of technical analysis tells us that it is the study of
pure market action and not the fundamentals of the instrument itself.

It refers to the study of the action of the market itself as opposed to the

study of the goods in which the market deals.

Edwards and Magee, Technical Analysis of Stock Trends

(AMACOM, 2007)

This next definition of technical analysis tells us that it is a form of art, and its
purpose is to identify a trend reversal as early as possible.

The art of technical analysis, for it is an art, is to identify a trend reversal

at a relatively early stage and ride on that trend until the weight of the

evidence shows or proves that the trend has reversed.

Martin Pring, Technical Analysis Explained, 4th Edition

(McGraw‐Hill, 2002)

The following definition is most relevant in the formulation of trading
strategies. It reminds the market participants that nothing is certain and we must
weigh our risk and returns.

Technical analysis deals in probabilities, never in certainties.

Martin Pring, Technical Analysis Explained, 4th Edition

(McGraw‐Hill, 2002)

The next statement gives a behavioral reason as to why technical analysis
works.