How to read mkt technicals? Ace trader Atul Suri explains Atul Suri tries to explain the details and the processes involved in a technical analysis of the markets.
Q: How will you describe the art of technical analysis?
A: Technical analysis is the art of studying prices and volume. It is as simple as that. You look at price. Most things in the market are subjective but price is a reality. There is no ambiguity or interpretation. When you study prices and predict or look at future trends it can be termed as technical analysis. Human beings commit the same errors time and again. Through prices, most people are going to behave in a certain way. Based on it, we try to predict future prices. Any big market top you will notice that is when the euphoria is at the highest, the optimism is the highest, the leverage is the highest. It really makes the market tops. This is something whether it was true in 1900-1920, 1950 2000, and 2013. When we study repetitive human behaviour through prices, we identify trends and by riding these trends is what we try to achieve in technical analysis. In all its simplicity, it is a study of price and volume.
Q: Where does volume fit in the equation and how important is it in technical analysis?
A: Volume is very important. There are lots of volume indicators too. Stocks are moving. There are thousands of stocks that are listed. A trader would always look for a big trend because that is how they are tradable and money is made. They are always accompanied with very good volumes like we use the term breakout. Breakout is essentially when price moves out of a certain range. Breakouts can happen by decimals and then fall back and fail which could be loss making. But when these happen, the trends become fruitful. When prices are accompanied with large volumes, then those price movements are what give you confidence. However price movements happen which really do not have large volume moves. You know that this is likely to fail. So volume cements the whole price moves. So it is a confirmation signal and it is very important in that sense.
Q: Which makes this whole concept of trend very important? People do not often understand that. How would you describe the stock or a market that is in an uptrend versus the downtrend? What marks out that clear directional move for it?
A: For this, I will have to go back to the father of modern technical analysis, Charles Dow. He came up with the Dow Theory and this is the first successful attempt which is even valid today of defining a trend. When a stock is moving up, every stock or market corrects. However, the next move surpasses the previous high and again it corrects. The next move again surpasses the previous high. So, essentially you say a market or a stock is in an uptrend. If the market makes new highs it’s like climbing steps; if you are blindfolded and every step you take is a higher step. So you know that you are climbing upstairs that means a trend is up. You are blindfolded but your next step is lower so that is the inverse. The moment the market starts making newer lows, you know that you are in a downtrend. When you look at the bigger moves in the market they are all one of the underlying principles is higher tops and higher bottoms and in an uptrend lower tops and lower bottoms in a downtrend.
