Technical analysis is the study of past market behavior to determine the current state or condition of the market. The technician looks at patterns of market behavior and then observes how the market reacts in these patterns. The technician then waits for a similar pattern to recur to see if the market reacts in a similar way. This enables the technician to determine what may happen to the market in the future. It is not much different than a doctor looking for symptoms or behavior patterns, to check the condition of a patient.

Technical analysis can be used in both a reactive or predictive way to analyze the market. In either case a technical trader observes the behavior of the market to detect its condition. A reactive method is one where the person responds to a situation. An example of a reactive system is our reflex system. Upon touching a hot surface we might react by immediately pulling our finger away. A predictive method is one where the person tries to anticipate what may happen in the future. After knowing a surface is hot, we may predict that touching it will cause a burn, so we now avoid it.

When technical analysis is used in a reactive way, a trader watches the market and then responds to it by buying or selling at the appropriate time. An example of trading in a reactive way is by buying or selling a breakout from a consolidation formation, such as a rectangle. A trader may either buy  if the market goes above the previous highs, or sell if the market goes below the previous lows, but does not make a trade until then. In this way, the trader is not always trying to predict the market, but instead, react to it. Again, this is no different than the doctor recommending a prescription if the patient should exhibit a certain behavior.

Some technicians employ technical analysis in a predictive manner. The technician will monitor market behavior and then try to predict market action. May using cycle theory to predict a bottom and potential buying opportunity. If the bottoms continue in a similar pattern we have a good indication of where and when the next bottom will appear. The technician, through studying the cycles of a market, is attempting to predict a bottom or top in the market. Various studies in cycle theory and wave analysis are examples of ways of trying to predict market behavior.