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Forex and the Dow Theory

Dow Theory was authored by Charles H. Dow from 1900 to 1902, his associates and followers articulated the theory in 1932. This theory is considered as one of the prime consulting theories in the study of the market. The technical analysis also finds its foundation in the Dow Theory. 


Charles Dow believed that a trader can recognize the direction of key trends in forex, commodities, and equities by analyzing the conditions and factors that are reflected in the asset values.


Following are the basic components of Dow Theory applied in the forex market:


Market price trends in currency trading


Primary trends are commonly known as “bull” and “bear” markets. It is also a general trend of the whole market which can last for a year. The secondary trends are known as temporary fluctuations in pricing. These trends naturally work against the primary trends. 


The secondary trend is denoted as market correction during a bullish phase. Daily fluctuations may vary and can be caused by many factors, from macroeconomic news to overbought conditions. Instead, a primary trend variation in the forex market moves in the same direction.


Phases of primary trends


According to Dow Theory, there are three phases of primary trends. In the bullish market, there are; accumulation, public participation, and the excess phase. In a bearish market, there will be the distribution phase, the public participation phase, and the despair or panic phase.


Informed investors will enter the market in the accumulation phase; in public participation, there will be a resurgence of massive public interest in the apprehensive currency pair, and in the excess phase, “first-mover” will distribute their holdings in the market.


Market discounts everything


The efficient market hypothesis drives the Dow Theory, EMH states that all available information should be incorporated in the asset prices. Competitive advantage, earning potential, and management competence or more factors are priced into the market. Even future proceedings are discounted in the form of risk in the reading of this theory.


Indexes should confirm each other


When more than one index displays similar trends then the transition of a bear into a bull or vice versa is possible. The complete direction of all markets reveals the economic conditions whether primary trends are up or down. For example, if two USD pairs are in not in the same direction then there is no clear trend reversal.


Volume must confirm the trend


The increase or decrease in volume corresponding to an upside or downside move is significant in cfd trading. For example, when volume increases in an uptrend, it indicates the strength, since more bets are placed by traders on the upward momentum. When the buying of assets starts dissipating, it means the volume is weak on the upward move. 


Trends continue until clear reversal occur


Reversals in primary trends can be confused with the secondary trends. It is challenging to decide whether an upsurge in a bearish market is a reversal or a short-lived correction. Trend reversal only takes place in the occurrence of concrete evidence. For example, if the EURUSD pair is following the downward direction but the NFP has released good news then the downward movement cannot be called a trend reversal.


Dow Theory was authored by Charles H. Dow from 1900 to 1902, his associates and followers articulated the theory in 1932. This theory is considered as one of the prime consulting theories in the study of the market. The technical analysis also finds its foundation in the Dow Theory. 


Charles Dow believed that a trader can recognize the direction of key trends in forex, commodities, and equities by analyzing the conditions and factors that are reflected in the asset values.


Following are the basic components of Dow Theory applied in the forex market:


Market price trends in currency trading


Primary trends are commonly known as “bull” and “bear” markets. It is also a general trend of the whole market which can last for a year. The secondary trends are known as temporary fluctuations in pricing. These trends naturally work against the primary trends. 


The secondary trend is denoted as market correction during a bullish phase. Daily fluctuations may vary and can be caused by many factors, from macroeconomic news to overbought conditions. Instead, a primary trend variation in the forex market moves in the same direction.


Phases of primary trends


According to Dow Theory, there are three phases of primary trends. In the bullish market, there are; accumulation, public participation, and the excess phase. In a bearish market, there will be the distribution phase, the public participation phase, and the despair or panic phase.


Informed investors will enter the market in the accumulation phase; in public participation, there will be a resurgence of massive public interest in the apprehensive currency pair, and in the excess phase, “first-mover” will distribute their holdings in the market.


Market discounts everything


The efficient market hypothesis drives the Dow Theory, EMH states that all available information should be incorporated in the asset prices. Competitive advantage, earning potential, and management competence or more factors are priced into the market. Even future proceedings are discounted in the form of risk in the reading of this theory.


Indexes should confirm each other


When more than one index displays similar trends then the transition of a bear into a bull or vice versa is possible. The complete direction of all markets reveals the economic conditions whether primary trends are up or down. For example, if two USD pairs are in not in the same direction then there is no clear trend reversal.


Volume must confirm the trend


The increase or decrease in volume corresponding to an upside or downside move is significant in cfd trading. For example, when volume increases in an uptrend, it indicates the strength, since more bets are placed by traders on the upward momentum. When the buying of assets starts dissipating, it means the volume is weak on the upward move. 


Trends continue until clear reversal occur


Reversals in primary trends can be confused with the secondary trends. It is challenging to decide whether an upsurge in a bearish market is a reversal or a short-lived correction. Trend reversal only takes place in the occurrence of concrete evidence. For example, if the EURUSD pair is following the downward direction but the NFP has released good news then the downward movement cannot be called a trend reversal.


 

 

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GVI Trading. Potential Price Risk Scale
AA: Major, A: High, B: Medium

Mon 27 May 2019
AAGB/US- Holiday
Tue 28 May 2019
A 14:00 US- Consumer Confidence
C 13:00 US- Case-Shiller
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A 08:55 DE- Employment
AA 18:00 US- BOC Decision
A 18:30 US- EIA Crude
Thu 30 Mar 2019
AAEZ/CH- Holiday
A 12:30 US- Weekly Jobless
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AA 10:00 EZ- Flash HICP
A 12:30 US- Personal Income, Spending, Deflator
AA 14:00 US- Final Univ of Michigan


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