Dow Theory in the Forex Market; Origins of Modern Technical Analysis

Dow Theory in the Forex Market; Origins of Modern Technical Analysis

Technical analysis is a very important tool, which forex traders use in order to know about the market movements and to predict price directions. Today what is known as a technical analysis theory, originated from ideas, which were proposed by Charles Dow along with his partner Edward Jones, at the end of the 19th century. That time it was referred as the Dow Theory and even in the current times this dominates the far, more urbane and prepared contemporary study of technical analysis in the currency market.

Some important points:

• Any factor that has an effect on demand and supply shows the same in the market prices.

• There are three trends in the forex market– uptrend, downtrend, and secondary trend. Also, as per Dow the laws of action and reaction find implication in the forex market as these do in the practical universe. This clearly indicates that each important movement is chased by a specific pullback.

• The trends in turn are made of three parts that are primary, secondary and minor, which is also referred as ripples. While, primary refers to tide, secondary is compared to waves and minor stands for the fluctuations that happen in the secondary trend.

• Any major trend in the forex market is made of three phrases, which are accumulation phase, public participation phase and distribution phase.

• Dow believed that averages must substantiate each other. He said that unless both industrial and rail averages surpass a past peak, there is no evidence of setting up or persistence of a bull market.

• Volume must comply with the trend. He said that the increase or decrease in volume is judged by the factor that where the price is moving- in the trend’s direction or in the opposite direction. Volumes as per him are a secondary indicator, and buy or sell signals according to him rely on closing prices.

• A trend is considered active, until it shows definite signs of reversal. The technical approach in the forex market revolves around the idea that trends remain in motion until an external force causes it to change direction, similar to the law of physics. In addition, there are some reversal signs that must never be overlooked.

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