Currency Technical Analysis Part 2: Dow Theory - Three stages of the Trend

Currency Technical Analysis Part 2: Dow Theory - Three stages of the Trend

In part 1 of this series of articles: "Currency Technical Analysis Part 1: The most important theory more" We discussed the general background of the Dow theory.

Here we look at the three stages of this trend, and why currency trading analysis must focus on long-term trend - as the Dow Theory will help you capture every major trend.

Currency Technical Analysis - Market Discount

Dow Theory is based on the classic view of technical currency analysis - that markets discount everything.

While accepting that the Dow Theory can always occur unexpectedly in a short period - the longer trend is unchanged - and if you think about it, it's true.

Central banks and geo political issues can unexpectedly jump in prices - but their impact tends to be short rather than long term.

Currency technical analysis should be understood to make big money - and should focus only on long-term trends.

The market reflects all available information - everything there is to know is already reflected in the markets - through price.

Because prices represent the total of all hopes, fears, and expectations, all market participants.

Interest rates in presidential elections, employment, consumer confidence - and everything else is already on the market price.

Short-term moves should not be traded

The unexpected will often occur in any form of currency technical analysis - but this will normally affect the short-term trend - but the primary trend will remain intact.

With this in mind, Dow Theory accept limitations - but if you focus on long-term trend, human odds in your favor, it can be a winner.

Look at any currency chart and you will see:

The currency of the technical analysis, the primary trends tend to last for months or years.

This is why the Dow Theory is applicable to foreign currency - this is not a trading day theory - which is the way cups of trading currencies.

The Three Stages of Trend

Dow and Hamilton identified three types of price movements:

1st Primary Movements

2nd Secondary Movements

3rd Daily Fluctuations

Primary Movements

Primary moves generally last several months to several years. These basic strokes are broad underlying trend of the market - the health of the primary market for trading foreign exchange. These are trends that currency traders should focus on, as they are trends that yield the greatest profit.

Secondary Movements

Intermediate movements, also known as a reaction to movements usually takes several weeks to several months - and move contrary to the basic trend. These movements are secondary actions that may be affected by such things as, the central bank manipulation, and geo political events.

Daily Fluctuations

Daily fluctuations generally move with or against the underlying trend - and lasts from several hours to several days - but usually no more than a week. These daily fluctuations ranges are really random - and re-traded in foreign markets.

Currency Technical Analysis for the serious trader

Dow Theory provides a mechanism for investors to use that will help remove emotions from trading, and focuses on long term trends.

Hamilton warned that investors should not be influenced by emotions. In a technical analysis of currency markets, you need to be objective and focused - see what is there, not what you want to see.

Dow Theory provides a mechanism in technical analysis of currency markets, to help you stay focused and disciplined at all times.

Methods for identification of the basic trend is set - and not open to interpretation.

Reflection of market psychology

If you want a clear picture of why things Dow theory, then you need to know how trends breasts - and this is explained in 3 stages:

. Accumulation

. The big move (excess and despair)

. Distribution

If you understand how these phases work in the currency of technical analysis, then you are well on your way to making big profits.

We will discuss these three stages - and the logic behind them, in part 3 of this series of articles.


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