For the speculator, the same kind of thinking applies, except that he is not interested in holding positions through secondary reactions that move against him; his object is to move with the intermediate-term trend in either direction. The speculator can use the short-term trend to look for signs that the intermediate-term trend is changing. The mindset learn more about trading psychology is different from that of the investor, but the basic principles used to identify change are very similar. The main focus of the prudent investor should be on the intermediate-term trend.
But to accurately focus on the intermediate-term trend, you have to understand it in relation to the long-term, or primary trend. This is one of the more controversial elements of Dow Theory, that the market reflects all available information. Interest rate movements, earnings expectations, revenue projections, presidential elections, product initiatives, and all else are already priced into the stock market or forex market which reacts faster to any change in sentiment.
By the time the news hits, the price has been bid up to fully reflect the news see how to trade the news. The first phase of primary trends determines that informed investors profit from an accumulation phase before a bull market or a distribution phase before a bear market.
Traders then move towards a second public participation phase, which is when the largest price movement occurs. A primary bear market is the long downward movement interrupted by important rallies. It is caused by various economic ills and does not terminate until stock prices have thoroughly discounted the worst that is apt to occur.
A primary bull market is a broad upward movement, interrupted by secondary reactions, and averaging longer than two years. During this time, stock prices advance because of a demand created by both investment and speculative buying caused by improving business conditions and increased speculative activity.
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Learn more about volume in technical analysis. This last tenet, that two opposing primary trends cannot coexist on two different market indices, was doubtless the most important to Charles H. In other words, the primary trend discovered on a stock market index must always be confirmed by a similar trend on another market index and vice versa.
It was in response to this final tenet that Charles H. Dow did not stop at creating the Dow Jones Industrial Average. He also contributed to the development of another market index, the Dow Jones Transportation Average. Although a lot has changed over the past years, the Dow theory and his tenets are still applicable today and are considered a valid trading strategy by many traders. Much of what we currently know about technical analysis has its root in the Dow theory.
This is why all financial operators using technical analysis should be familiar with the basic principles of the Dow Theory. We have sent a password to your email. Please check your inbox. Please be careful when entering your password and email. You may be blocked for further unsuccessful login attempts. What is the Dow Theory Dow Theory has been around for almost years, yet even in today's volatile and technology-driven markets, the basic components of Dow Theory still remain valid.
Who is Charles Dow Charles Dow developed Dow Theory from his analysis of market price action in the late 19th century. Dow Theory Explained The Dow theory is based on the analysis of maximum and minimum market fluctuations to make accurate predictions on the direction of the market.
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Dow Theory Trading Strategy Most trading strategies used today hinge on one key concept, the "trend". The long-term trend is by far the most important trend and the easiest to identify, classify, and understand. It is of primary concern to the investor and, to a lesser extent, the speculator. The intermediate- and short-term trends are subsidiary components of the longterm trend and can only be understood and fully taken advantage of through recognition of their status within the long-term.
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The intermediate-term trend is of secondary importance to the investor and of primary importance to the speculator learn more about swing trading. It can move with the long-term trend or against it. If the intermediate-term trend significantly retraces the long-term trend, it is characterized as a secondary reaction or a correction. The characteristics of a secondary reaction must be closely evaluated to avoid confusing it with a change in the long-term trend. The short-term trend is the least predictable and is of primary concern only to the short term trader learn more about day trading and scalping.
The speculator's and investor's interest in the short-term trend should consist almost solely in optimizing profits and minimizing losses by the timing of buys and sells within the short term movement. There are three principal phases of a bear market: the first represents the abandonment of hopes upon which stocks were purchased at inflated prices; the second reflects selling due to decreased business and earnings the third is caused by distress selling of sound securities, regardless of their value, by those who must find a cash market for a least a portion of their assets.
There are three phases of a bull period: the first is represented by reviving confidence in the future of business; the second is the response of stock prices to the known improvement in corporations earnings the third is the period when speculation is rampant and inflation [of stock prices] apparent-a period when stocks are advanced on hopes and expectations.
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What is the Dow Theory
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