Source: Tutorials in Applied Technical Analysis by Daryl Guppy January 14, 2002.
Chart analysis is often confused with predicting or forecasting the market. This confusion is enhanced by those who confuse trading and investing.
Chart analysis uses the action of price and volume to clearly show how the market has behaved. For traders, the past pattern of behavior helps to identify market situations that have a high probability of a specific action. The trading approach requires the trader to develop a plan to cope with the
probability, or when that probability does not eventuate.
When we cross the road we pause at the kerb, check right, left and right, then cross. The curb tells us changed conditions ahead, but it tells us nothing about the actual events on the road. We prepare to behave in a particular way depending on what the road reveals. Here the trader prepares to act one way if certain conditions are met, and another way if different conditions are met.
Forecasting uses the higher probability situations in an attempt to project future price action and acts in anticipation of this. It straddles the boundary between trading and investing. Here we stand at the traffic lights, stepping out confidently when the walk sign flashes. Sometimes we get wiped out as a car crashes through the walk signal, but most times the signal is reliable. When we see the signal we can forecast the action for a selected period of time. Here traders act when the event occurs.
Prediction is a different beast altogether. It carries a high level of certainty about the occurrence of events at a specific time. Some Gann and Elliott wave analysts make quite specific predictions. This is like saying that I know there is a set of traffic lights at the end of the block, and that at 10.38 am the signal will be flashing walk. This leaves little room for probability, although there are times when such predictions match the co-incident events. This means the predictions come true. Separating the co-incidence for accurate predictive ability is difficult. The tendency with prediction is for traders, or investors to act in anticipation of the event.