Technical analysis is a method of studying price movements and volume traded based on objective assessment. With technical analysis, analysts discount the influence of external fundamental factors, focusing solely on the information contained within the price data. They believe that since the price action is an after effect of external influences, all the fundamentals are factored into the price action already.
For example, let’s say there are fundamentalists and technical analysts shopping in a mall. The fundamentalists would first visit each store and study the products before making their purchasing decision.
Technical analysts, on the other hand, will disregard the intrinsic value of the products in the stores, but instead focus on the people that are entering the stores.
From the pattern of activity observed from the people visiting the stores, the technical analysts will then formulate their purchasing decision. This decision making process is actually based on several assumptions.