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Dow forexWhat is Dow Theory Technical Analysis. One of the oldest principles in technical analysis, the Dow Theory guides traders to this day. For almost a hundred years, the Dow Theory technical analysis principles fascinated traders. Those still wondering what is Dow Theory, will find this article useful for Forex trading too. Traditionally, there are two ways to look at a market. A fundamental method and a technical method. In Forex trading, fundamental analysis deals with interpreting the economic news. Mostly. Or, trading on long-term time frames. Traders interpret changes in macroeconomic policies around the world. Moreover, they speculate on them. But technical analysis is more pragmatic. It deals with indicators that act as tools to forecast price. Or, future prices. Speculation has never been easier as is today. Simply open a trading platform. Next, put some indicators on a chart.

Finally, buy and sell when indicators tell you to. With the right money management approach, chances are you’ll make some money. But there’s more to trading than that. How about understanding why the market moves? Or, how it will move? Many tried to put an order in the market’s chaotic moves. From Elliott and Gartley to Gann and DeMark…technical analysis is full of such examples. But none influenced it like Charles Dow. To this day, the Dow Theory treats markets like no other before. This article will cover: What is Dow Theory? Influential thinkers that shaped Dow Theory The three stages of Dow theory technical analysis Pros and cons of Dow Theory technical analysis. All trading theories mentioned above (Elliott, Gartley, Gann, etc.) have their origin at the start of the last century. And, Dow Theory is no different. It all started with how the market moves… Nowadays, every trader heard of DJIA.

It stands for Dow Jones Industrial Average. What many don’t know is that the name comes from one of its founders. Charles Dow. A brilliant thinker, Dow was fascinated with how the market moves. Relentlessly, he tried to find a logic to it. We all know now that the market swings result from supplydemand imbalances. More buyers, the market rises. More sellers and the market falls. Of course, volume matters too. However, this is the starting point. The idea is that the market moves in waves. And, such imbalances create them. The Dow Theory was born on this principle. Like Elliott later, Dow tried to figure out human nature’s influence on market behavior. After all, a combination of swings creates a trend. What if one can put an order in the market swings? The Dow Theory is not the only approach Dow had to understand markets. He wrote many reports that served as a barometer of general business activity.

But, he never put his ideas together. It was someone else that did. Sam Nelson, a market technician of the time, coined the phrase Dow Theory. He put everything together. He made sense of Dow’s principles. And so, the main pillar of technical analysis was built. Today, the Dow Theory principles shape the way traders look at trends. Moreover, Dow Theory technical analysis concepts have a great forecasting power. Later, William Hamilton refined the theory into what it is today. And, in 1932, Robert Rhea went even further. He put together Dow’s, Nelson’s and Hamilton’s findings. As such, the Dow Theory technical analysis concepts were born.

Basic Tenets of Dow Theory. Before going into details, we must cover the basics of this beautiful theory. Or, what is Dow Theory? But, keep in mind that the original Dow Theory technical analysis principles were modified in time. The following are the most important considerations: The market discounts all news. A powerful statement, especially for the Forex market today. With trading algorithms interpreting news and snippets, discounting the news gets difficult. Yet, a market moves based on human interaction. And, humans program robots. As such, the market, in the end, WILL discount all news.

The market moves in cycles. Either bullish or bearish one. Dow identified three cycles: the main movement, the medium swing, and the short swing. At least, those were the original names. Time distorted the notion. But, the idea remained. To this day, the Dow Theory has three market movements going on simultaneously. That’s important! Volume confirms trends. That’s tricky in the Forex market. The volume shows only the broker’s transactions. However, it offers an educated guess.

Trends exist until they Any trend has its pullbacks. Dow tried to spot true reversals from fake ones. With these basic points in mind, let’s try to see what makes Dow Theory fascinated? The Three Stages of Dow Theory Technical Analysis. The Dow Theory considers the market makes three price movements: Primary movement. Or, a primary trend. This is where the Dow Theory Forex traders focus. It can last from a few months to several years. Secondary movement. This is a reactionary move. It goes against the main trend.

Or, the primary one. It goes from few weeks to a few months. Daily fluctuations. They can go with or against the main trend. And, can take from a few hours to a few days. In today’s Forex trading, there’s a trading style for each movement. Traders involved in the biggest cycle, the primary movement, are long-term traders. The next cycle belongs to swing traders. Finally, intraday traders deal with day-to-day movements. Or, daily fluctuations. You probably noticed that the Dow Theory addresses the market cycles. But, in today’s technical analysis, the three movements represent a bullish or bearish trend. Or, a series of higher highs and higher lows, in a bullish trend.

On the other hand, a bearish trend shows a series of lower lows and lower highs. A closer look at the image above shows what all Forex traders know. A trend’s definition. After all, what is Dow Theory if not a concept to ride trends? But, as always, there’s a catch. The Dow Theory technical analysis deals with bigger trends. In today’s Forex trading, it starts from the bigger time frames. EURUSD Dow Theory Forecasts. Check the chart below. It shows the EURUSD on the monthly chart. The Dow Theory focuses on the primary trend. But, if this one takes several years, traders must address the right time frame. In this case, the monthly chart. Remember the Dow Theory technical analysis principles?

A series of lower lows and lower highs makes a bearish trend. That’s exactly what we have here. The blue line shows the primary movement. Or, the main trend. Bearish. Everything in between makes the secondary movement. Or, the reaction to the main trend. These are pullbacks. Designed to be sold. Until when? Until the market breaks the main trend line.

And, the lower highs series gets broken. For the downtrend to reverse, a higher high and a higher low must occur. If not, the market simply makes secondary movements. Basically, the Dow Theory gave us the definition of a trend. Remember, this was a hundred years ago! Dow Theory Primary Trend – Stage 1 – Accumulation. The three stages of any Dow Theory analysis consider market psychology. They differ in a bull and a bear market. Before a bull trend starts, the market accumulates. If you want, it builds energy to break higher. Excessive pessimism at the end of the previous bearish trend ends. Only the brave ones buy here. In today’s Forex trading, triangles show accumulation.

More exactly, contracting ones. Or, the ones that act as a reversal pattern. The EURUSD monthly chart shows a triangle. Not any kind. But, one that acts as a reversal pattern. Dow Theory technical analysis principles call this accumulation stage. Or, the first stage in a new, bullish trend. How do we know the previous trend ended? Remember the lower highs series?

Here’s where we use it. It took some time until the pair consolidated. Accumulation started. Next, the price broke higher. Finally, it broke the previous lower high. With all conditions in place, a new trend started. A bullish one. From now on, the opposite moves are secondary. Or, simple corrections. Until the series reverses. Traders wondering what is Dow Theory used for, here’s the answer. It tells with great accuracy conditions for market turns. And, it does that way ahead of time. Traders only need to pay attention to details.

What is Dow Theory – Stage Two – Big Move. This is the longest stage of a primary trend. Or, primary bull market. Typically, fundamentals come to help. Interest rates rise, because of improving economies. Central banks react. They tighten monetary policy. Money becomes expensive. As such, the most powerful currency in a currency pair rises.

It’s the easiest stage to make money with. In Elliott Waves Theory, this is the third wave in an impulsive move. Bears are crushed. Bulls are thrilled. The chart above shows the big move. The blue line tells what the primary trend is. Dow Theory Bull Market – Stage Three – Excess. And then, bulls get a reality check. Secondary pullbacks become more powerful. Moreover, excessive speculation is visible. However, confidence is still high.

Any meaningful pullback sees buyers stepping in. Yet, “smart money” sense something is wrong. Sellers appear. And, in the end, the trend turns. In a bearish trend, the first stage is identical to the third one in a bullish trend. Only that it has a different name. The Dow Theory calls it distribution. As such, the third stage in a bull market is the first one in a bear. What next? Again, the series of higher lows must be broken. And so, a new trend starts. A bearish one, this time. By now, you know to interpret a market with the Dow Theory. We won’t discuss the next EURUSD cycle. You’ve already got the picture. As such, the three stages in a bearish trend are: Distribution.

The big move, or the main trend. Despair. But this is not all. As Dow Theory introduced theoretical concepts too. Ones that forever changed the way traders looked at charts. “The Averages Discount Everything” – What is Dow Theory? One of the biggest believes Dow had was that everything is priced in. That all known information is already in a market’s move. After all, this is the very core belief of technical analysis. Technical traders have analytical minds. No matter what the fundamentals say, a technical concept remains a technical concept. The market already discounted the news. As such, technical traders have great results if they don’t think of the news. They strive to remain unbiased. That’s the core trait of the Dow Theory.

Once a move started, everything is in. Dow Theory and the Concept of Confirmation. But perhaps the most powerful concept is confirmation. The Dow Theory technical analysis calls for trend reversals to be confirmed. In today’s technical analysis, this concept is widely used. Think of it for a bit. What do current Forex traders use to spot a reversal? Let me help you. Oscillators. More exactly, divergences with an oscillator. The original Dow Theory stated that a change in the primary trend must be confirmed by other indices. In today’s technical analysis, a change in the primary trend must be confirmed by a divergence. As such, today’s Dow Theory technical analysis is incomplete without a divergence. Traders use either the RSI (Relative Strength Index) or other famous oscillators. The idea is to stick with the oscillator. And not with the price.

Because the oscillator considers more candles, chances are the price makes a fake move. That’s the confirmation the Dow Theory looked for. What is Dow Theory – Volume Confirmation. Rhea and Hamilton expanded Dow’s idea about confirmation. Volume came into discussion. The idea is the following. In a primary trend, the volume should increase. However, not in any direction. But, in the direction of the primary trend. Let’s consider a bullish trend. The volume should be bigger when the market advances than during corrections. The chart above shows the volumes on the EURUSD earlier analysis. We notice an increase in volume after the biggest secondary move. That’s a confirmation of the bullish trend.

Yet, another one set by the Dow Theory. However, in the Forex market, the volume is relative. As mentioned earlier, it shows only the volume of the broker. Because the Forex market is so big, it is impossible to see all parties that change hands. Over five trillion dollars change hands every day. Such volume is impossible to track on the long run. Cons of Dow Theory Technical Analysis. Many argue that the Dow Theory is not really a trading theory. It is more a concept. This may, or may not be true. But the Dow Jones theory, as it is also called, shows powerful trends that Forex traders can ride. One hundred years later, the concept is still valid. Others say that the theory is late. It lags prices. Of course, that it is easier nowadays to say that. We have personal computers. We simply open a trading platform and can time reversals.

Sometimes, by the pip. A hundred years ago it was about understanding. More than about actual trading. And, the markets are different. The Forex market today is not the same as the stock market at the start of the 1900’s. Because of that, the Dow Theory detractors say that it is outdated. However, one cannot ignore the benefits it brings to understanding cycles. What is Dow Theory if not the start of understanding waves? Or, better: what is Dow Theory if not an early version of the Elliott Waves Theory? Even better: what is Dow Theory if not the cornerstone of today’s technical analysis? It’s the main pillar. That’s what the Dow Theory is. The Dow Theory was the first one to treat market psychology. A closer concept to the Dow Theory technical analysis is the Elliott Waves Theory. Elliott went into more details. He took the main trend and found a five-wave structure unfolds.

Of a lower degree. Or, waves within waves. Then, the secondary movements, or the reaction, he called them corrections. Or, corrective waves. This is the Elliott Waves Theory. A five-wave structure corrected with a three-wave one. Did Elliott continue Dow’s work? We don’t know that. However, we know he was inspired by it. For what is Dow Theory if not a way to understand market psychology? To sum up, the Dow Theory calls for a primary trend. One that forms on bigger time frames. It keeps building higher highs and higher lows, or lower lows and lower highs. The trend goes until the series breaks. Three stages make a trend.

And, confirmation is needed when the trend breaks. Confirmation comes from a divergence. Or, from a correlated market that doesn’t confirm the move. In Forex trading, it comes from a similar currency pair. For example, if the GBPUSD and other dollar pairs don’t confirm the EURUSD moves, the markets diverge. Or, there’s no confirmation. Other traders use volume. This works extremely well in the stock market. To some extent, it works in the Forex market too. Today, the Dow Jones theory technical analysis is widely used in Forex trading. Like it or not, know it or not. Are you an Elliott Wave trader? If yes, you use basic Dow Theory concepts. Are you a technical trader that uses divergences? Yet, another Dow Theory technical analysis concept.

All in all, Forex traders have an edge when using the Dow Theory principles. They understand what drives the market. GET STARTED WITH THE FOREX TRADING ACADEMY. Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer. He is the author of thousands of educational and analytical articles for traders. When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders. He was awarded a cup and a certificate at an official ceremony in his university. Algorithmic Trading (1) Course: Forex Trading for Beginners (6) Course: MQL4 for Complete Beginners (48) Course: Strategy Tester for Beginners (11) FOREX (90) Forex Strategy (90) Forex Trading for Beginners (74) Forex VPS (1) Fundamental Analysis (3) Interviews (1) Miscellaneous (4) MQL4 (2) Technical Analysis (13) GET STARTED WITH THE FOREX TRADING ACADEMY. Forexboat Pty Ltd (ABN: 29 609 855 414) a Corporate Authorised Representative (AR No. 001238951) of HLK Group Pty Ltd (ACN: 161 284 500) which holds an Australian Financial Services Licence (AFSL no. 435746). Any information or advice contained on this website is general in nature only and does not constitute personal or investment advice. We will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. You should seek independent financial advice prior to acquiring a financial product.

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Your forecast comes with a free demo account from our provider, IG, so you can try out trading with zero risk. Your demo is preloaded with ?10,000 virtual funds , which you can use to trade over 10,000 live global markets. We'll email you login details shortly. You are subscribed to John Kicklighter. You can manage you subscriptions by following the link in the footer of each email you will receive. An error occurred submitting your form. Please try again later. Top headlines to end the week was the implementation of the US-China reciprocal ($34 bln) tariffs and June NFPs Despite the rubber hitting the road on trade wars, US equity indices buoyed sentiment - raising questions for sentiment Key event risk ahead are unscheduled updates on the trade war, the Fed's report to Congress, BoC rate decision and Brexit news. What do the DailyFX Analysts expect from the Dollar, Euro, Equities, Oil and more through the 3Q 2018?

Download forecasts for these assets and more with technical and fundamental insight from the DailyFX Trading Guides page . A Rebound In the S&P 500 and Dow Despite Trade War Action. Much of the trade war that has unfolded thus far has been threats or signal of intent for tariffs to be placed in the future (or triggered as retaliation upon the instigator's move). What the headlines signaled this past week was the definitive implementation of a very high burden on trade between the United States and China - the two largest economies in the world. As of midnight Friday, the US started to enforce $34 billion in tariffs against a list of Chinese goods in response to perceived long-term intellectual property theft. Occurring concurrently, China would also execute its own import taxes on US goods at the same scale. The subsequent $16 billion in duties that would round out the initial $50 billion threat are due sometime in the coming two weeks. This is definitively a step towards curbing global growth and the circulation of capital; and yet, the benchmark 'risk' assets climbed through Friday's end. The From a mixed view in the Asian and European sessions, the major US indices afforded a clear advance with the Dow winning a wedge break above 24,400 and the S&P 500 securing its best two-day rally in two months with a charge above 2,740. The State of Risk and Influence of Trade Wars Ahead. If we were to simplistically extrapolate the market's performance through the end of the week, some may draw the conclusion that trade wars have been priced in and now do not matter or that sentiment is simply so robust it can concur all (a power so many song attribute to 'love'). Of course, that is an unreasonable assessment.

Trade wars matter and they are progressing. Even if it doesn't spur a move to protect capital before the economic pain hits, the impact to actual growth is inevitable and detrimental. This is like ignoring smoke before the fire engulfs us. Exactly what has the capacity to revive our sensitivity to trade wars moving forward is unclear, but it probably isn't an ignorance that will be entertained for long. There are few scheduled events that can be directly tied to the next stage of the escalation. Threats or calls for reason between the United States and China are important events to watch for. However, for sheer global and sentiment impact, little will compare for risk to true progress in the auto tariff risks between the US and EU. Dollar Has Multiple Temptations but No Conviction As Yet. While the US equity indices didn't render the expected response to the trade wars, the Dollar finally took a dive this past week as the risk of a collective retaliation started to enter the collective conscious. The trade-weighted DXY Index (heavily skewed towards the EURUSD) cleared recent support and is closing in on the 50-day moving average. Where this favorite benchmark is already marking progress, an equally-weighted index has leveled up to support without actually making the requisite technical break. The June NFPs this past Friday did little to shift focus to the economy or monetary policy, but next week's scheduled event risk can help urge the market's focus elsewhere. The consumer inflation data (CPI) and Fed's monetary policy report to Congress will put rate speculation to the test - for better or worse - while the University of Michigan consumer sentiment and NFIB small business sentiment surveys will gauge confidence amid policy changes. Pound Will Double Down on Brexit, Loonie Counting Down to the BoC. Both the Pound and Canadian dollar were loaded for high level event risk to close out this past week. There was some significant development on both fundamental fronts, but rather little actual market movement. It may be reserving its response for the week ahead. While GBPUSD advanced on news that UK Prime Minister Theresa May won support for her 'soft Brexit' approach to the customs union internally, the real test is whether the EU is warm to their position. Brexit will remain top of mind for the Sterling; and until we have a clear view of its path, don't expect unfettered trends for GBPUSD, EURGBP and other GBP crosses. As for the Canadian dollar, the blend of employment and trade statistics offered a general improvement on the former and clear decline for the latter.

Nevertheless, the Loonie made a limited move through Friday's close. The Bank of Canada (BoC) rate decision this coming Wednesday may offer a less complicated cue for the currency to follow. With USDCAD angling for a reversal, it is natural to find more speculative interest here, but AUDCAD and NZDCAD carry less contradictory baggage. We discuss all of this and more in this weekend Trading Video. If you want to download my Manic-Crisis calendar, you can find the updated file here . DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Dow Jones 30 Futures - Sep 18. Latest comments Dow 30. Richard, not sure if you trade gold but I am looking to buy gold around 1208 next week if price gets there. . (Read More) 18 hours ago · Reply. Long red candle is on the way . (Read More) 19 hours ago · 1 · Reply. Do not want to carry position.. . (Read More) 19 hours ago · Reply.

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Therefore Fusion Media doesn’t bear any responsibility for any trading losses you might incur as a result of using this data. Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers. Dow Theory for Beginners. The Dow Theory (by Charles Dow) is more than 100 years old and has stood the test of time. A few of its principles are as valid today as they were decades earlier. Though it was written for the equity markets, it can also be used to trade Forex profitably. In this article (Dow Theory for Beginners), we will learn how to identify the primary or main trends as explained by the Dow Theory . We will also learn to tweak the entry and exit signals using Exponential Moving Averages and Trend lines and profit from it. Trading with the trend is one of the best ways to make money in the Forex markets. Most new traders try to trade against the trend or enter very late and suffer huge losses. A sound knowledge of determining a trend in its initial stage can earn you handsome profits. Dow theory can help us to determine a trend and trade with it. According to Dow theory, a trend consists of three categories, Primary, Secondary, and Minor trends. Let’s understand all the three in detail and learn how to identify them on any chart. Primary Trend. A primary trend also known as the main trend in a bull market is identified by a series of higher highs and higher lows. Price continuously makes a new high, retraces back approximately 33% to 66% of the rise and again continues to make new highs.

The trend remains in force for one year to a few years. For a bear market, price forms lower highs and lower lows, all other things remain the same. Bad results, unfavorable news, geopolitical events can cause small breaks in the primary trend, but the price quickly reverses back and continues in its original direction. Traders who identify the primary trend and continue to trade in its direction till it lasts are handsomely rewarded. Using the Dow theory, we will attempt to identify the primary trend in the following chart. It is easy to identify the primary trend in this chart. A series of higher highs and higher lows are marked on the chart. Price on the left side of the chart was in a downtrend. The trend changed from down to up at the point marked by the thick arrow. At this point, the sequence of lower highs and lower lows were broken with price making a new high. Once trend changed, it remained in force for almost a year.

An example of a downtrend is shown in the next chart. Trend change from Uptrend to Downtrend. Now we shall see how we can identify a primary trend in a bearish market. The following chart shows how an uptrend changed to a downtrend. As seen in the chart, after a brief consolidation trend changed from bullish to bearish. A sequence of higher highs and higher lows were broken when a series of lower highs were formed. These are marked on the chart using multiple arrows, the break below the previous higher low confirmed a trend change. The new bearish trend remained in force for almost a year. Secondary Trend.

A secondary trend is a correction in the ongoing primary trend. The pullbacks can be anywhere between 33% to 66% of the main trend. Only in rare cases, the pullback can be up to 100% of the rise. The secondary trend continues for three weeks to three months after which the primary trend resumes. The secondary trend is marked on the chart above with thin arrows; the primary trend which is down is shown with a thicker arrow. The secondary trend is sharp and violent. After a sharp countertrend move, the primary trend resumes. Minor Trend. Minor trend lasts a few hours to a few days, but not more than three weeks. It is random in nature and is not profitable to trade; it should be ignored according to Dow Theory. An attempt to trade the minor trends can lead to stop-loss hits, frustration, a string of losing trades and loss of confidence. It is therefore advised to always trade in the direction of the primary trend. Phases of a Primary Trend. According to the Dow Theory, a primary bull trend consists of three phases.

An accumulation phase where informed buyers start accumulating, followed by a steady phase where most of the trend followers enter the trend. And it ends with a blowout phase when everyone is into the trade. A bearish trend starts with a distribution phase where informed investors sell their positions when everyone else is buying, trend followers start selling in the steady phase, despair grips most of the market participants and the blowout phase ends with a steep decline. The left side of the chart shows the blowout phase for the downtrend. The accumulation starts after the downtrend, followed by steady and blowout phase which ends the uptrend. Confirmation with volume. Dow Theory gives importance to volume and suggests a trend backed by volume is likely to be strong and continues for a longer duration compared to a trend which lacks volume. Criticism of Dow Theory. Dow theory doesn’t identify a top or a bottom, it shows a trend change after almost 20-30% of the move has already occurred.

Some traders criticize the Dow theory for this reason. But it is important to note that only a handful of traders profit by identifying and trading the top and bottom turning points. Most successful traders are those who follow trends and earn decent profits by identifying the larger trends and staying with it. How to use Dow theory in Forex. Dow theory was primarily designed for the equity markets. It has proved its mettle successfully over the last century in the equity markets. Its principles can be utilized in the Forex markets by combining the trend identification methods of Dow Theory with Trendlines and Moving Averages. Examples of buy signal in an uptrend Using trends of the Dow theory, we shall identify buying opportunities in the following chart. Point 1 is the beginning of an uptrend and a buy can be initiated at this point. We have already explained how to identify an uptrend. Traders can also use moving averages for entries. Point 2 on the chart shows an entry using moving averages. As the trend is up, we are looking only for buy signals. After the secondary trend is completed, price resumes in the direction of the main trend.

We wait for both the 20 and 50 EMAs to turn up, and price to break above both the moving averages. It retraces to point 2, where the 50 EMA provides support. A buy can be initiated when the price moves above the 20 EMA again. The trend lines in this chart cannot be used for generating buy signals, but they can be used to take profits on the long positions. Examples of Sell signals in a downtrend. There are three shorting opportunities in the above chart. Point 1 is a Dow Theory sell signal, as already explained in earlier charts. A short can be initiated at the breakdown point. Point 2 is a confirmation of resumption of the primary trend after a secondary trend which retraces almost two-thirds of the fall. Price breaks below the 20 & 50 EMA, both the EMAs turn down, price retests the EMAs at point 2 and fails. We enter here when price breaks below the 20 EMA. Point 3 is a shorting opportunity on a retest of the downtrend line. Shorts can be initiated on a move below the 20 EMA. Placing a Stop Loss. We have two buy signals and three sell signals from both the charts, we have used very basic rules where we identify the primary trend and trade in its direction using Moving Averages and Trendlines. We don’t attempt to trade the secondary trends and minor trends. Though we have a good entry point on all the trades and price moves favorably in our direction of trade, without a proper stop loss we will not be able to profit handsomely.

A trend change confirmation signal using the Dow theory comes very late; it will be difficult to use it in Forex Trading. Therefore, we should tweak the exit signals and trail our Stop losses just below the 20 EMA for uptrends and above the 20 EMA for downtrends. New traders spend a lot of time with complex indicators and search for the holy grail of trading. It is better to learn the basics of Dow theory and identify the primary or main trend. Entry and exit points can be tweaked according to their own trading style. We have shown, how you can use moving averages and trendlines to identify profitable trading opportunities in the direction of the primary trend. These are general guidelines, nip it to suit your requirement and profit from it. *DAILYFX is an independent legal entity and is not affiliated with Dow Jones. Dow Jones does not endorse or sponsor DAILYFX or the content on this website. Get Your Free Equities Forecast. Improve your accuracy by identifying key technical levels. Find out the fundamentals that look likely to drive future price action. Learn from DailyFX experts with decades of market experience. What is Dow Theory Technical Analysis. One of the oldest principles in technical analysis, the Dow Theory guides traders to this day. For almost a hundred years, the Dow Theory technical analysis principles fascinated traders.

Those still wondering what is Dow Theory, will find this article useful for Forex trading too. Traditionally, there are two ways to look at a market. A fundamental method and a technical method. In Forex trading, fundamental analysis deals with interpreting the economic news. Mostly. Or, trading on long-term time frames. Traders interpret changes in macroeconomic policies around the world. Moreover, they speculate on them. But technical analysis is more pragmatic. It deals with indicators that act as tools to forecast price. Or, future prices. Speculation has never been easier as is today. Simply open a trading platform. Next, put some indicators on a chart.

Finally, buy and sell when indicators tell you to. With the right money management approach, chances are you’ll make some money. But there’s more to trading than that. How about understanding why the market moves? Or, how it will move? Many tried to put an order in the market’s chaotic moves. From Elliott and Gartley to Gann and DeMark…technical analysis is full of such examples. But none influenced it like Charles Dow. To this day, the Dow Theory treats markets like no other before. This article will cover: What is Dow Theory? Influential thinkers that shaped Dow Theory The three stages of Dow theory technical analysis Pros and cons of Dow Theory technical analysis. All trading theories mentioned above (Elliott, Gartley, Gann, etc.) have their origin at the start of the last century. And, Dow Theory is no different. It all started with how the market moves… Nowadays, every trader heard of DJIA. It stands for Dow Jones Industrial Average.

What many don’t know is that the name comes from one of its founders. Charles Dow. A brilliant thinker, Dow was fascinated with how the market moves. Relentlessly, he tried to find a logic to it. We all know now that the market swings result from supplydemand imbalances. More buyers, the market rises. More sellers and the market falls. Of course, volume matters too. However, this is the starting point. The idea is that the market moves in waves. And, such imbalances create them. The Dow Theory was born on this principle. Like Elliott later, Dow tried to figure out human nature’s influence on market behavior. After all, a combination of swings creates a trend. What if one can put an order in the market swings? The Dow Theory is not the only approach Dow had to understand markets.

He wrote many reports that served as a barometer of general business activity. But, he never put his ideas together. It was someone else that did. Sam Nelson, a market technician of the time, coined the phrase Dow Theory. He put everything together. He made sense of Dow’s principles. And so, the main pillar of technical analysis was built. Today, the Dow Theory principles shape the way traders look at trends. Moreover, Dow Theory technical analysis concepts have a great forecasting power. Later, William Hamilton refined the theory into what it is today. And, in 1932, Robert Rhea went even further. He put together Dow’s, Nelson’s and Hamilton’s findings. As such, the Dow Theory technical analysis concepts were born. Basic Tenets of Dow Theory. Before going into details, we must cover the basics of this beautiful theory. Or, what is Dow Theory?

But, keep in mind that the original Dow Theory technical analysis principles were modified in time. The following are the most important considerations: The market discounts all news. A powerful statement, especially for the Forex market today. With trading algorithms interpreting news and snippets, discounting the news gets difficult. Yet, a market moves based on human interaction. And, humans program robots. As such, the market, in the end, WILL discount all news. The market moves in cycles. Either bullish or bearish one. Dow identified three cycles: the main movement, the medium swing, and the short swing. At least, those were the original names. Time distorted the notion. But, the idea remained. To this day, the Dow Theory has three market movements going on simultaneously.

That’s important! Volume confirms trends. That’s tricky in the Forex market. The volume shows only the broker’s transactions. However, it offers an educated guess. Trends exist until they Any trend has its pullbacks. Dow tried to spot true reversals from fake ones. With these basic points in mind, let’s try to see what makes Dow Theory fascinated? The Three Stages of Dow Theory Technical Analysis. The Dow Theory considers the market makes three price movements: Primary movement. Or, a primary trend. This is where the Dow Theory Forex traders focus.

It can last from a few months to several years. Secondary movement. This is a reactionary move. It goes against the main trend. Or, the primary one. It goes from few weeks to a few months. Daily fluctuations. They can go with or against the main trend. And, can take from a few hours to a few days. In today’s Forex trading, there’s a trading style for each movement. Traders involved in the biggest cycle, the primary movement, are long-term traders. The next cycle belongs to swing traders. Finally, intraday traders deal with day-to-day movements. Or, daily fluctuations.

You probably noticed that the Dow Theory addresses the market cycles. But, in today’s technical analysis, the three movements represent a bullish or bearish trend. Or, a series of higher highs and higher lows, in a bullish trend. On the other hand, a bearish trend shows a series of lower lows and lower highs. A closer look at the image above shows what all Forex traders know. A trend’s definition. After all, what is Dow Theory if not a concept to ride trends? But, as always, there’s a catch. The Dow Theory technical analysis deals with bigger trends. In today’s Forex trading, it starts from the bigger time frames. EURUSD Dow Theory Forecasts. Check the chart below.

It shows the EURUSD on the monthly chart. The Dow Theory focuses on the primary trend. But, if this one takes several years, traders must address the right time frame. In this case, the monthly chart. Remember the Dow Theory technical analysis principles? A series of lower lows and lower highs makes a bearish trend. That’s exactly what we have here. The blue line shows the primary movement. Or, the main trend. Bearish. Everything in between makes the secondary movement. Or, the reaction to the main trend.

These are pullbacks. Designed to be sold. Until when? Until the market breaks the main trend line. And, the lower highs series gets broken. For the downtrend to reverse, a higher high and a higher low must occur. If not, the market simply makes secondary movements. Basically, the Dow Theory gave us the definition of a trend. Remember, this was a hundred years ago! Dow Theory Primary Trend – Stage 1 – Accumulation. The three stages of any Dow Theory analysis consider market psychology. They differ in a bull and a bear market.

Before a bull trend starts, the market accumulates. If you want, it builds energy to break higher. Excessive pessimism at the end of the previous bearish trend ends. Only the brave ones buy here. In today’s Forex trading, triangles show accumulation. More exactly, contracting ones. Or, the ones that act as a reversal pattern. The EURUSD monthly chart shows a triangle. Not any kind. But, one that acts as a reversal pattern. Dow Theory technical analysis principles call this accumulation stage. Or, the first stage in a new, bullish trend. How do we know the previous trend ended? Remember the lower highs series? Here’s where we use it. It took some time until the pair consolidated.

Accumulation started. Next, the price broke higher. Finally, it broke the previous lower high. With all conditions in place, a new trend started. A bullish one. From now on, the opposite moves are secondary. Or, simple corrections. Until the series reverses. Traders wondering what is Dow Theory used for, here’s the answer. It tells with great accuracy conditions for market turns. And, it does that way ahead of time. Traders only need to pay attention to details. What is Dow Theory – Stage Two – Big Move. This is the longest stage of a primary trend. Or, primary bull market.

Typically, fundamentals come to help. Interest rates rise, because of improving economies. Central banks react. They tighten monetary policy. Money becomes expensive. As such, the most powerful currency in a currency pair rises. It’s the easiest stage to make money with. In Elliott Waves Theory, this is the third wave in an impulsive move. Bears are crushed. Bulls are thrilled. The chart above shows the big move. The blue line tells what the primary trend is. Dow Theory Bull Market – Stage Three – Excess.

And then, bulls get a reality check. Secondary pullbacks become more powerful. Moreover, excessive speculation is visible. However, confidence is still high. Any meaningful pullback sees buyers stepping in. Yet, “smart money” sense something is wrong. Sellers appear. And, in the end, the trend turns. In a bearish trend, the first stage is identical to the third one in a bullish trend. Only that it has a different name. The Dow Theory calls it distribution. As such, the third stage in a bull market is the first one in a bear. What next? Again, the series of higher lows must be broken.

And so, a new trend starts. A bearish one, this time. By now, you know to interpret a market with the Dow Theory. We won’t discuss the next EURUSD cycle. You’ve already got the picture. As such, the three stages in a bearish trend are: Distribution. The big move, or the main trend. Despair. But this is not all. As Dow Theory introduced theoretical concepts too. Ones that forever changed the way traders looked at charts. “The Averages Discount Everything” – What is Dow Theory?

One of the biggest believes Dow had was that everything is priced in. That all known information is already in a market’s move. After all, this is the very core belief of technical analysis. Technical traders have analytical minds. No matter what the fundamentals say, a technical concept remains a technical concept. The market already discounted the news. As such, technical traders have great results if they don’t think of the news. They strive to remain unbiased. That’s the core trait of the Dow Theory. Once a move started, everything is in. Dow Theory and the Concept of Confirmation. But perhaps the most powerful concept is confirmation. The Dow Theory technical analysis calls for trend reversals to be confirmed. In today’s technical analysis, this concept is widely used. Think of it for a bit. What do current Forex traders use to spot a reversal? Let me help you. Oscillators. More exactly, divergences with an oscillator.

The original Dow Theory stated that a change in the primary trend must be confirmed by other indices. In today’s technical analysis, a change in the primary trend must be confirmed by a divergence. As such, today’s Dow Theory technical analysis is incomplete without a divergence. Traders use either the RSI (Relative Strength Index) or other famous oscillators. The idea is to stick with the oscillator. And not with the price. Because the oscillator considers more candles, chances are the price makes a fake move. That’s the confirmation the Dow Theory looked for. What is Dow Theory – Volume Confirmation. Rhea and Hamilton expanded Dow’s idea about confirmation. Volume came into discussion.

The idea is the following. In a primary trend, the volume should increase. However, not in any direction. But, in the direction of the primary trend. Let’s consider a bullish trend. The volume should be bigger when the market advances than during corrections. The chart above shows the volumes on the EURUSD earlier analysis. We notice an increase in volume after the biggest secondary move. That’s a confirmation of the bullish trend.

Yet, another one set by the Dow Theory. However, in the Forex market, the volume is relative. As mentioned earlier, it shows only the volume of the broker. Because the Forex market is so big, it is impossible to see all parties that change hands. Over five trillion dollars change hands every day. Such volume is impossible to track on the long run. Cons of Dow Theory Technical Analysis. Many argue that the Dow Theory is not really a trading theory. It is more a concept. This may, or may not be true. But the Dow Jones theory, as it is also called, shows powerful trends that Forex traders can ride. One hundred years later, the concept is still valid.

Others say that the theory is late. It lags prices. Of course, that it is easier nowadays to say that. We have personal computers. We simply open a trading platform and can time reversals. Sometimes, by the pip. A hundred years ago it was about understanding. More than about actual trading. And, the markets are different. The Forex market today is not the same as the stock market at the start of the 1900’s. Because of that, the Dow Theory detractors say that it is outdated. However, one cannot ignore the benefits it brings to understanding cycles.

What is Dow Theory if not the start of understanding waves? Or, better: what is Dow Theory if not an early version of the Elliott Waves Theory? Even better: what is Dow Theory if not the cornerstone of today’s technical analysis? It’s the main pillar. That’s what the Dow Theory is. The Dow Theory was the first one to treat market psychology. A closer concept to the Dow Theory technical analysis is the Elliott Waves Theory. Elliott went into more details. He took the main trend and found a five-wave structure unfolds. Of a lower degree. Or, waves within waves. Then, the secondary movements, or the reaction, he called them corrections.

Or, corrective waves. This is the Elliott Waves Theory. A five-wave structure corrected with a three-wave one. Did Elliott continue Dow’s work? We don’t know that. However, we know he was inspired by it. For what is Dow Theory if not a way to understand market psychology? To sum up, the Dow Theory calls for a primary trend. One that forms on bigger time frames. It keeps building higher highs and higher lows, or lower lows and lower highs. The trend goes until the series breaks. Three stages make a trend.

And, confirmation is needed when the trend breaks. Confirmation comes from a divergence. Or, from a correlated market that doesn’t confirm the move. In Forex trading, it comes from a similar currency pair. For example, if the GBPUSD and other dollar pairs don’t confirm the EURUSD moves, the markets diverge. Or, there’s no confirmation. Other traders use volume. This works extremely well in the stock market. To some extent, it works in the Forex market too. Today, the Dow Jones theory technical analysis is widely used in Forex trading.

Like it or not, know it or not. Are you an Elliott Wave trader? If yes, you use basic Dow Theory concepts. Are you a technical trader that uses divergences? Yet, another Dow Theory technical analysis concept. All in all, Forex traders have an edge when using the Dow Theory principles. They understand what drives the market. GET STARTED WITH THE FOREX TRADING ACADEMY. Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer. He is the author of thousands of educational and analytical articles for traders. When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders.

He was awarded a cup and a certificate at an official ceremony in his university. Algorithmic Trading (1) Course: Forex Trading for Beginners (6) Course: MQL4 for Complete Beginners (48) Course: Strategy Tester for Beginners (11) FOREX (90) Forex Strategy (90) Forex Trading for Beginners (74) Forex VPS (1) Fundamental Analysis (3) Interviews (1) Miscellaneous (4) MQL4 (2) Technical Analysis (13) GET STARTED WITH THE FOREX TRADING ACADEMY. Forexboat Pty Ltd (ABN: 29 609 855 414) a Corporate Authorised Representative (AR No. 001238951) of HLK Group Pty Ltd (ACN: 161 284 500) which holds an Australian Financial Services Licence (AFSL no. 435746). Any information or advice contained on this website is general in nature only and does not constitute personal or investment advice. We will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. You should seek independent financial advice prior to acquiring a financial product. All securities and financial products or instruments transactions involve risks. Please remember that past performance results are not necessarily indicative of future results. The information on this site may be accessed worldwide however it is not directed at residents in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

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