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Before beginning a study of the actual techniques and tools used in technical analysis, it is necessary first to define what technical analysis is, to discuss the philosophical premises on which it is based, to draw some clear distinctions between technical and fundamental analysis and, finally, to address a couple of criticisms frequently raised against the technical approach.
The author's strong belief is that a full appreciation of the technical approach must begin with a clear understanding of what technical analysis claims to be able to do and, maybe even more importantly, the philosophy or rationale on which it bases those claims.
First, let's define the subject. Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. The term“market action”includes the three principal sources of information available to the technician—price, volume, and open interest. (Open interest is used only in futures and options.) The term“price action,”which is often used, seems too narrow because most technicians include volume and open interest as an integral part of their market analysis. With this distinction made, the terms“price action”and“market action”are used interchangeably throughout the remainder of this discussion.