Some traders usually use a variety of technical indicators, these technical indicators are derived from the "Dow Theory" put forward a century ago.
The founder of "Dow Theory" was Charles Henry Dow (1851-1902), he founded Dow Jones & Company and the famous "Wall Street Journal" (The Wall Street Journal), and Invented the Dow Jones Industrial Index. From 1900 to 1902, he published many commentary articles on the stock market in The Wall Street Journal, expressing his views on the stock market trend.
After the death of Charles Dow, reporters from the "Wall Street Journal" compiled his articles and opinions into the book "Preliminary Speculation", which officially named Dow Theory. Although Charles Dow did not systematically elaborate on Dow theory, nor did he publish any monographs in this area, later generations still regarded it as the originator of Dow theory. The formation of Dow Theory has gone through decades. After the death of Charles Dow, William Peter Hamilton and Robert Rhea inherited the Dow theory, and organized and summarized them in the subsequent writing of comments on the stock market. Become the theory we see today.
Although many emerging market movement theories are gradually occupying the mainstream academic status, the Dow Theory was indeed a revolutionary theory at the time, and it has a far-reaching impact today.
Dow Theory has laid the foundation for the formation of many well-known technical analysis theories. In the subsequent development of technical analysis, Elliott Wave Theory is a well-known technical method for analyzing market trends. This theory can be traced back to the "Dow Theory". Market psychology and how it affects price trends".
Overview of theories and methods
In the field of technical analysis, Dow Theory is the originator of all market technical analysis (Technical Analysis, including wave theory, Gann theory, etc.). Although he is often criticized for "reacting too late," and sometimes ridiculed by those who refuse to believe his judgment (especially in the early stages of a bear market), anyone who has experience with the stock market has something to say about it. Heard it and is respected by most people. But people never realize that it is completely simple and technical. It is not based on anything else. It is the behavior of the stock market itself (usually expressed as an index), rather than the commercial statistics that the people of Fundamental Analysis rely on.
Dow Theory Inheritance of Dow Theory
The formation of Dow Theory has gone through decades. After the death of Charles Dow in 1902, William Peter Hamilton and Robert Rhea inherited Dow Theory and organized them in the process of writing subsequent reviews on the stock market And induction into the theory we see today. Their "Stock Market Barometer" and "Dow Theory" have become classic works for later generations to study Dow Theory.
The essence of Dow Theory
It is worth mentioning that the founder of this theory, Charles Dow, claimed that his theory is not used to predict the stock market, or even to guide investors, but a barometer that reflects the overall market trend. Most people regard Dow Theory as a means of technical analysis-this is a very regrettable view. In fact, the greatest thing about the "Dow Theory" lies in its precious philosophical thoughts, which are all its essence. Rhea emphasized in all relevant writings that "Dow Theory" is designed to be an aid or tool to enhance the knowledge of speculators or investors. It is not an aid or tool that can be divorced from basic economic conditions and market conditions. A full range of rigorous technical theory. By definition, "Dow Theory" is a technical theory; in other words, it is a method of speculating on future price behavior based on the study of price patterns.
Three hypotheses of Dow Theory
01
The Dow Theory has three extremely important assumptions, which are the basis of the entire theory. There are similarities with the three hypotheses of technical analysis theory that people usually see. However, here, Dow Theory focuses more on the understanding of its market implications.
Hypothesis one
Manipulation-Daily fluctuations of indexes or securities and weekly Dow theoretical basis may be subject to manual manipulation, and secondary reactions may also be limitedly affected in this respect, such as common adjustment trends, but mainly Primary trend is not subject to human manipulation.
Hypothesis Two
The market index will reflect every piece of information-every market person who understands financial affairs, all his hopes, disappointments and knowledge will be reflected in the daily closing price fluctuations of the Shanghai Stock Index, Shenzhen Index or any other index ; Therefore, the market index will always properly anticipate the impact of future events. In the event of disasters such as fires, earthquakes, and wars, the market index will also be quickly evaluated. In the market, people constantly evaluate and judge endless topics such as financial policies, capacity expansion, leaders' speeches, institutional violations, and the Growth Enterprise Market, etc., and constantly reflect their psychological factors into market decisions. Therefore, the market always seems difficult to grasp and understand to most people.
Hypothesis Three
Dow Theory is an objective analysis theory-successfully using it to assist speculation or investment behavior requires in-depth research and objective judgment. When you use it subjectively, you will continue to make mistakes and lose money.
Dow theory asserts that prices will change in the same direction with the market trend to reflect market trends and conditions. Changes in prices are manifested in three trends: main trend, medium-term trend and short-term trend.
Main trend
For a year or more, most stocks will rise or fall with the market, generally exceeding 20%.
Mid-term trend
The direction opposite to the basic trend lasts for more than three weeks and the range is one-third to two-thirds of the basic trend.
Short-term trend
It only reflects short-term changes in stock prices, and the duration does not exceed six days. The characteristic of a bull market is that the main trend is composed of three main upward momentum, which is interrupted by two declines, such as a weak period. Throughout the activity cycle, the decline may be lower than expected, each time lower than the last time. In the entire activity cycle, it usually consists of several mid-term trend declines and recovery. Dow theory applied to foreign exchange transactions
The application of Dow Theory to foreign exchange transactions is nothing new. The first technical analysis theory that many foreign exchange traders come into contact with is Dow Theory.
If you are a novice in foreign exchange trading, it will be very helpful for you to be familiar with Dow Theory. The most essential part of Dow Theory is: exploring the relationship between human psychology and the market, and revealing the behavior of market participants through human psychology to reflect Changes in the relationship between supply and demand on both sides of the market.
Dow theory originated from the study of the stock market, but its basic principles are also applicable in the foreign exchange market. Short-term trading is often very difficult for traders, so why not just do long-term trading? The analysis of trends by Dow Theory is suitable for long-term traders in the foreign exchange market, and has a good guiding role.