Dow Theory Application on the Forex Market

The Dow Theory serves as the basis for the fundamental principles that guide the technical analysis. The theory has the following principles:

• The trend is your friend

  Changes in currency prices on the forex market follow trends. There are three types of trends:

  • Down trends (also known as bearish)
  • Flat trends (also known as sideways)
  • Up trends (also known as bullish)
• Three phases of major market trends

  The market is characterized as following three main trends:

  • major (also known as primary), which lasts around 1 year
  • intermediate (also known as secondary), which lasts 1 month or more
  • minor, which lasts several days or weeks

  The major trend consists of three phases, which are accumulation, public participation, and distribution. During the accumulation phase astute forex traders are actively buying (selling) against the common opinion of the other participants on the forex market. During the second stage (the public participation phase) the rest of the market participants catch on to what the traders "in the know" are doing and tend to enter the trend as well. In the final stage (the distribution phase) again the shrewdest traders tend to withdraw their profits and close the positions, whereas the overall trading interest calms down while the market overshoots.

  The intermediate trend represents a correction of the major trend. This trend may repeat part of the primary trend.

• The market knows everything

  Prices give an overall view of the forces that guide the market. The currency price reflects any new market information as soon as it becomes available.

• History repeats itself

  Generally, the movements in prices repeat over the time. This is reflected in the same patterns that appear periodically on the charts.

• Trends are confirmed by volume

  The term volume refers to the total amount of a particular currency that has been traded within a particular time period. When currency price movements are accompanied by low trading volume, this is considered a warning to forex traders to close their positions. But when the volume of the currency trading is large, this is considered to be the "true" market view.

• Trends last until broken

  Generally, trends tend to exist until there is a confirmation of their reversal and a definitive signal proves that they have ended.

To be successful at forex trading you need two main things - the knowledge and the right trading plaftorm. For a trading platform we can recommend you Easy Forex. It offers unique features such as Inside Viewer™, which will give you a unique insight of what other traders are doing, competitive spreads, 24/7 support, etc. Start trading from as little as $25.

Bookmark this page :