How to read the stock market

A key mistake non-professional do is to study the intra-day performance of an index. But what counts is the closing level. If, for example the Dubai Financial Market General Index (DFMGI) rises at the opening by two percent but eventually closes one percent higher compared to the day before, then the one percent increase counts and nothing else.

Focus on volumes on market breadth

Based on the closing, traders should look at two indicators: volumes and market breadth. Both figures can be seen daily on the bourse's official websites.

High volumes do not necessarily mean that a market rally is sustainable. In fact, if indexes rise over a longer period of time and volumes shoot up, it can be an indication that the buying spree is exaggerated, and traders should exit the market. That happened at the end of the first quarter this year, when the DFMGI rose 22% in three months and volumes reached multiple-year highs. The rally happened too sharp, too fast, and until end of May Dubai's year-to-date gain was driven back to 5%.

When trading individual stocks, retail investors should focus on liquid shares. Liquid shares are those which are traded most actively over a longer period of time. All official websites of GCC equity exchanges display the most liquid shares on the daily basis. Serious chart analysis is only possible with liquid shares, also called blue chips. Less liquid shares are difficult to trade and small volumes can trigger huge price movements in both directions.

Another helpful figure is market breadth. If those shares that have advanced outnumber the shares which have declined then market breadth is positive and vice versa. Again, only the advance-decline at the market's closure is relevant.

Market breadth can be used to identify turning points. If market breadth is positive over a longer period of time and the advance-decline ratio grows higher and higher with every session, then traders should start booking profits as this scenario usually indicates that a rally has come to an end.

The same can apply when the market declines. When an index slump is sharp and market breadth goes deeper in the red with every trading day, the turnaround is normally around the corner, at least for the short term.

A very useful chart tool which helps to predict future market performance is Bollinger Bands. Named after its developer John Bollinger, Bollinger Bands simply measure the dynamic of market volatility. Graphically, they appear like bands enveloping an index, while the middle band is a simple moving average.

Leaving mathematics beside, they can be used for simple trading tactics. If an index or stock charts touches the upper Bollinger Band, then it can be interpreted as a sell signal and vice versa. If a chart passes the middle band, then an existing trend is confirmed.

Bollinger Bands can be uploaded for free for most GCC index and stock charts on brokerage website which provide chart tools.