Dow Theory in Technical Analysis
The world first heard about Dow theory near the end XIX century. The founder of the theory himself at that time was a simple editor of a newspaper and one of the founders of the company of the same name. Dow’s publications were subsequently supplemented by W. Hamilton and J. Schaefer, who finally determined the main provisions of this theory.
Today, the axioms of this theory are applicable to technical analysis, which is actively used to work in financial markets, including foreign exchange.
The main postulates of the theory are as follows:
1. The price in the market is a reflection of it. That is, any information, events occurring at the moment in the world are displayed on the price change.
2. Indexes existing on the market take into account everything. That is, any factor that can somehow affect the demand or supply in the market will be reflected in the fluctuations in the dynamics of the index. Despite the fact that there is no way to predict these factors, the market instantly takes into account their presence, changing the dynamics of the indices.
3. The price makes directional movements. These movements can have both uptrends and downtrends. In the case of an upward movement, each next peak and subsequent decline is higher than the previous one. In a downtrend, each next peak and decline is lower than the previous one. Accordingly, in the case of a horizontal trend, peaks and troughs are at the same level in all cases.
4. The main trend has three phases: origin, continuation and reversal.
In the first phase, trades start to be made by the most prudent traders. They have already analyzed all the negative information and therefore they calculate in advance the possible receipt of profitability from operations.
In the second phase, the majority of traders see the first steps to conclude deals and decide to do the same.
In the third phase, traders are in a hurry to consolidate their profits and close deals, as the market becomes rush and the volume of speculation actually begins to inflate a bubble.
5. Trading volumes in the market confirm any trend. The volume refers to the amount of a certain currency with which transactions were made per unit of time. Accordingly, a relative increase in the trading volume indicates an increased interest in this instrument, its decrease indicates a decline in interest, and therefore it is necessary to close deals.
Thus, we briefly reviewed another theory of technical analysis, which, in combination with the basic tools, is quite capable of bearing fruit in the foreign exchange market.