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Currency Technical Analysis Part 2: Dow Theory - Three Phases
of the Trend
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Article
Currency Technical Analysis Part 2: Dow
Theory - Three Phases of the Trend
In part 1 of this series of articles: “Currency Technical
Analysis Part 1: The Most Important Theory Ever” we discussed
the general background to the Dow Theory.
Here we look at the three phases of the trend, and why currency-trading
analysis must focus on the long-term trend - and how Dow Theory
will help you capture every major trend.
Currency Technical Analysis – Market Discount
Dow Theory is based upon the classic view of currency technical
analysis - that markets discount everything.
While Dow Theory accepts that the unexpected can always
occur in the short term - the longer trend is unaffected - and
if you think about it, this is true.
Central banks and geo political concerns can spike prices
unexpectedly - but their influence tends to be short, rather
than long term.
Currency technical analysis needs to be understood to make
big money – and you need to focus on just the long-term trends.
The market reflects all available information - everything
there is to know is already reflected in the markets - through
the price.
Prices therefore represent the total of all the hopes, fears,
and expectations, of all the participants in the market.
Interest rates, presidential elections, employment, consumer
confidence - and everything else, is already priced into the
market.
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 unaffected.
With this in mind, Dow Theory accepts limitations - but
if you focus on the longer term trend, and trade with the odds
in your favor, you can be a winner.
Look at any currency chart and you will see:
In currency technical analysis, primary trends tend to last
for months or years.
This is why Dow Theory is so applicable to currency trading
– this is not a day trading theory - which is a mugs way of
trading currencies.
The Three Phases of a Trend
Dow and Hamilton identified three types of price movements:
1. Primary Movements
2. Secondary Movements
3. Daily
Fluctuations
Primary Movements
Primary moves generally last a few months to several years.
These primary moves represent the broad underlying trend of
the market – the health of the underlying market in currency
trading. These are the trends that currency traders should focus
on, as they are the trends that yield the biggest profits.
Secondary Movements
Secondary Movements, also known as reaction movements generally
last a few weeks to a few months - and move counter to the primary
trend. These secondary movements are moves that can be affected
by such things as, central bank manipulation, and geo political
events.
Daily Fluctuations
Daily fluctuations generally move with, or against the primary
trend - and last from a few hours to a few days - but usually
not more than a week. These daily fluctuations moves, are really
random - and are un-tradable in currency markets.
Currency Technical Analysis for the Serious Trader
Dow Theory provides a mechanism for investors to use that
will help remove emotion from trading, and focus on the long-term
trends.
Hamilton warned that investors should never be influenced
by emotions. In the technical analysis of currency markets,
you need to be objective and focused - see what is there, and
not what you want to see.
Dow Theory provides a mechanism in the technical analysis
of currency markets, to help you stay focused and disciplined
at all times.
The methods for identifying the primary trend are laid down
- and are NOT open to interpretation.
Reflecting Market Psychology
If you want a clear view of why Dow Theory works, then you
need to know how trends build - and this is explained in 3 phases
by:
. Accumulation
. The Big Move (excess and
despair)
. Distribution
If you understand how these phases work in currency technical
analysis, then you are well on your way to making big profits.
We will discuss these three phases - and the logic behind
them, in part 3 of this series of articles.
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