Initially, the principles set forth by Charles Dow, were used for the analysis of established American indexes: industrial and rail. But with the same result the majority of the Dow theory, the analytical findings can be applied in the currency markets.
The indices take into account everything. According to Dow theory, any factor that could, one way or another, affect the supply or demand, always will be reflected in the dynamics of the index. Of course, these events are unpredictable, however, they are immediately taken into account the market and affect the dynamics of the indices.
The indices take into account everything. According to Dow theory, any factor that could, one way or another, affect the supply or demand, always will be reflected in the dynamics of the index. Of course, these events are unpredictable, however, they are immediately taken into account the market and affect the dynamics of the indices.
On the market there are three types of trends. With upward trend each successive peak is higher than the previous and each subsequent decline is also higher than the previous one. With each subsequent downward trend below the previous peak and each subsequent "bottom" is lower than the previous one. When horizontal trend (flat) each successive peak (and decline) is about the same level as the previous ones.
Dow also provides three types of trends: primary, secondary and minor. The greatest value he attached to it is the primary or major trend, which lasts more than a year, and sometimes several years. Secondary or intermediate trend is the correction to the basic trends and usually lasts from three weeks to three months. These interim amendments (kickbacks) are from one to two-thirds (often half) the distance traveled prices during the previous (main) trend. Small or short-term trends last for no more than three weeks and are short-term fluctuations in the intermediate trend.
Despite the fact that the most common terms used to describe trends - short, medium and long term - defined by most analysts as time, in our opinion, is more properly a classification proposed by Thomas Demarco. The changes in prices, that used to take weeks or months, now taking place a few hours. With the increasing market liquidity, speed of information dissemination under the influence of the herd instinct of managers of investment funds, as well as many other factors, these timeframes continue to narrow. More correctly use the terms "short", "medium" and "long term" not in relation to time intervals, and in relation to the percentage change in prices.
A move by less than 5% - short-term, from 5% to 15% - medium-term, more than 15% - long-term. There is a special DeMark method for predicting the start of market trends - from medium to long-term. This method is based on a set of special factors - factors trends.
The main trend has three phases. Phase one, or the accumulation phase - when the most far-sighted and well-informed investors start buying, because all unfavorable economic information is already covered by the market. The second phase occurs when the game are those who use technical methods of following trends. After the economic information is becoming more optimistic, the trend is in its third and final phase, when the action takes the general public, and the market begins to boom, fueled by the media. Economic forecasts in newspapers and on television are full of optimism. This is the first sign of the end of the trend.
Indices must confirm each other. Here Charles Dow was referring to the industrial and railway indexes. He believed that any important signal to increase or decrease in rate in the market must pass in the values of both indices. Regarding modern technical analysis, this assertion means that the signal received from a technical indicator, must be confirmed by the testimony of another technical indicator.
The volume of trade should confirm the trend. Increased trade should occur at times when prices are moving in the direction of the main trends, and the reduction - in periods of retracement.
The trend is valid for as long as will not give clear signals that it has changed.
