Statistically Analyzing Volume by William M. Goodman, Ph.D.
Is an increase in the activity of a stock a meaningful indication of the direction of price? To answer this question, you can use statistical methods and most any spreadsheet to analyze the relationship between price and volume.
Technical analysis is an ongoing creative process of determining order in a complex pattern. In general, the pattern is reduced to a graphical or mathematical model, but a model is simply not enough. You need confirmation, and by rigorously testing your methods, you gain confidence that your findings have value.
How can you be sure a new technical indicator has merit? In the case of a price pattern, you test the pattern over different time periods or sets of charts, making buys and sells at the points suggested by the technique. This simple research can easily answer the pertinent question: Would trading based on the price pattern make you money?
This elementary form of research can be effective. Alex Saitta used it in a STOCKS & COMMODITIES article to confirm a link between US employment reports and the Treasury bond futures market. He tracked the gains and losses that would have occurred if his method had
been applied over a selected period. The trading system made more money than if the buy/sell
decisions had been made by chance alone.