WHAT IS TECHNICAL ANALYSIS ?

Technical analysis is an organized and systematic study of market action through use of charts, of a particular scrip or index for the purpose of identifying trend changes at an early stage and to maintain an investment or speculative position until the weight of the evidence indicates that the trend has changed with the help of price and volume data of any share or index. Technical analysis is basically studying the price action or behaviour only.

BASIC PRINCIPLES OF TECHNICAL ANALYSIS

• Technical study remains more as an art. At best it can be considered as an empirical science wherein judgment plays an important role in successful performance.

• Price discounts everything and Price is supreme.

The price of any scrip is the result of all the factors affecting it, which are far reaching and to narrate a few it may be —

MICRO FACTORS :- the industry prospects to which the company belongs or the performance of the company or the management of the company, brand image of the company , monopolistic element, competitors strength, financial strength and in country like India political strength may too play an important role in determining the price of particular scrip.

MACRO FACTORS:- Political condition (to which ours like markets are too sensitive), economic health of the country, climatic conditions, even nuclear blasts or who is the finance minister.

They are also reflection of hopes, fears, knowledge, optimism and greed of the investing public The sum total of these emotions are expressed in the price level.

A technical analyst is only concerned with the price of the scrip and to form a judgment about whether the market is bullish or bearish. He is not concerned with the cause and effect relations or in finding out the factors or reason for change in the price. As explained above, price is the resultant of all the factors affecting it and since the technical analyst’s study concerns with price and only price, he is not at all concerned with the reasons which have influenced the price.

A true technical analyst will not give importance to the NEWS and he will not be influenced by the news in making any trading decisions. He has to become immune to what is going around him and just concentrate on the PRICE.

• Market moves in trend and when established remains in force until there is evidence of change.

Market has Rhythm. It moves in trend and hence it is possible to interpret the market. History repeats because human nature does not change. The market moves are cyclic and repetitive, The market does not move in random. Once the trend is set it continues in that direction and before reversing its direction it will give proper signals indicating change of trend.

• Market action is repetitive :

The charts patterns are repetitive, hence one can interpret the future behaviour of the price, e.g. Head and Shoulder pattern is bearish formation and on break out from such pattern prices can be expected to fall. This is because human nature tends to react to similar situations in consistent ways. Human psychology do not change everywhere all over the world. The price movements are a mere reflection of mass human response.

• Market discounts future :

We usually see, when the good news for a particular scrip is announced, the price of that scrip falls. The reason is, the market has already gone up in the recent past on the expectation of such good news and when the news are declared there is profit booking. It is said that Mandy starts from a silver sky, and when only good news are coming from every corner. A technical analyst talking about change of trend from Teji to Mandi in such booming times is believed to be a lunatic. The reason is, market has collective intelligence, which is supreme, and it knows that something bad is going to happen in future and the market begins to decline. Only market can foresee not any single individual. Similarly Teji starts when there is no hope and all is bad around you. So Teji starts in gloom and Mandi starts in Boom.

• Technical analysis is workable in any free market economy.

• Technical Analysis is complete tool in itself and a technical student is able to take all trading and investment decision based on technical study only and he is not suppose to analyze any other data/information etc., micro/macro level.

• Stock market and Human behavior all over the world are the same and hence one can successfully employ technical analysis to any stock markets of the world.

• Do not trade without proper stop loss, since technical analysis gives probability and it may be possible that on any particular occasion, the odds may be against him and the only way to safeguard, is to use stop loss.

• In science there is cause and effect relation, but in the market we find reverse situation. In market we find effect (in terms of price movements) takes place first and the cause (reason) is known later.

• Market is usually ahead of news. Do not marry any scrip. Do not buy on news. Do not buck the trend. Do not buy because prices are low, or do not sell just because the prices are too high.

DOW THEORY

The Dow theory is the grandfather of all technical studies.

Mr. Charles H. Dow is the inventor of technical analysis. Dow founded the Dow -Jones financial new service and is credited with the invention of stock market averages. Mr. Dow found that market moves in motion. Dow theory is being critisized for being too late. Following are the Tenants of Dow Theory:—

• The Market ( Index) Discounts Everything

Because they reflect the combined market activities of thousands of investors including those possessed of the greatest foresight and the best information on trends and events, the averages in their day-to-day fluctuations discount everything known, everything foreseeable, (except the act of God), and every condition which can affect the supply of or the demand for corporate securities.

• The Three Trends

• The Primary Trends

These, as aforesaid, are the broad, overall up and down trends which usually (but not invariably) last for more than a year and may run for several years. So long as each successive rise (price advance) reaches a higher level than the one before it, and each secondary reaction stops (i.e., the price trend reverses from down to up) at a higher level than the previous reaction, the Primary Trend is deemed to be Up. This is called a Bull Market. Conversely, when each intermediate decline carries prices to successively lower levels and each intervening rally fails to brings them back up to the top level of the preceding rally, the primary Trend is Down, and that is called a Bear Market.

• The Secondary Trends

These are the important reactions that interrupt the progress of prices in the Primary direction. They are the Intermediate declines or “corrections” which occur during Bull Markets or the intermediate rallies or “recoveries” which occur in the Bear Markets. Normally, they last for from three weeks to as many months, and rarely longer. Normally, they retrace the previous move from one-third to two-thirds of the gain (or loss, as the case may be) in prices registered in the preceding swing in Primary direction. Thus, in a Bull Market, prices might rise steadily, or with only brief and minor interruptions. Thus we have two criteria by which to recognize a secondary trend. Any price movement contrary in direction to the primary trend which lasts for at least three weeks and retraces at least one-third of the preceding net move in the Primary direction (from the end of the preceding secondary to the beginning of this one, disregarding minor fluctuations) is labeled these criteria.

• The Minor Trends

These are the brief fluctuations which are so far as the Dow Theory is concerned— meaningless in themselves, but which in toto, make up the Intermediate trends. Usually, but not always, an Intermediate swing, whether a secondary or the segment of a primary between successive secondaries, is made up of a series of distinguishable Minor waves. Inferences drawn from these day-to-day fluctuations are quite apt to be misleading. The Minor trend is only one of the three trends which can be “manipulated” Primary trends cannot be manipulated; it would strain the resources of the Apex bank of any country.

The Primary, Secondary and Minor trends are compared with the tidal waves. In a high tide every next wave reaches higher and higher points, this is the Primary trend, while one can see the tide receding during the high tide movements which is the secondary trend which is against the primary trend, and the minor trend can be compared with the small waves movements - the ripples.

With the help of Technical Studies one can take profitable investment and speculative decisions in stock markets.