Did you know that investors and traders will use many ways and systems used to get profit, both fundamentally and technically? However, of the many choices that are in front of you, such as the most basic theory, what you need to know in helping the market analysis process, is Dow Theory.
What is Dow Theory?
As a trader, you need to know the basic understanding of Dow Theory to its history so that your knowledge becomes more complex.
Dow Theory or commonly known as Dow Theory is one of the basic theories of technical analysis. It was first revealed by Charles H. Dow (1851-1902) in 255 Wall Street Journal.
During his lifetime, Dow was known as a journalist and editor of the Wall Street Journal. He is also the founder of Dow Jones and Company.
The first research done by Dow is to divide the shares he owns on Wall Street into 2 parts, namely the Industrial Index and the Transportation Index.
During the research, he said, industrial development would be followed by the expansion of the transportation sector.
Why did this happen? Because according to Dow, factories need transportation to distribute goods from their production.
In 1880, Dow is known to have moved to New York, which is where he began to meet someone who worked on Wall Street and worked as a reporter in the stock market.
From the results of technical analysis, an idea was born from Charles Dow together with his colleague Edward Jones who worked at the Dow Jones and Company since 1882.
They published the idea in the Wall Street Journal until now the idea is accepted by most adherents of technical analysis.
Get to know the Dow Theory method
In addition to knowing the meaning and history, you also need to pay attention to several market methods according to Dow Theory. Dow Theory has 6 types of methods, the following is an explanation.
- The Dow Theory method regarding the forex market has 3 different swing movement patterns, namely there are long-term main swings, medium swings, and short-term swings (short swings).
- In addition to having 3 patterns, the next type of method has 3 phases consisting of an initial purchase by investment experts, then a public purchase phase, and finally a sales phase carried out by experts when prices reach an increase. This is done to realize the profit or (profit taking phase).
- The next method of Dow Theory, which is about the publication of rumors that have been cut in price by the market as depicted in the price itself.
- Dow Theory and inter-market have a close relationship, namely with the movement of one type of market can affect other markets (intermarket relationship).
- The Dow Theory method has a trend strength that always confirms the amount of trading volume or (especially for markets that have an exchange). Usually volume will confirm where a trend or price movement is real or fake.
- So, it is certain that Dow Theory uses volume with the aim of making a certainty in determining an increasing trend. Given the trend of the Dow Theory will be considered correct if the volume increased when the trend started. The purpose of the explanation above is, if the price decreases followed by an increase in transaction volume, it is easy to confirm if the market is in a downtrend. On the other hand, if the market price increases and is followed by volume, it will be referred to as an up trend.
- From a trend that continues to move until a signal appears indicating a reversal movement. However, if a decline reaches 20% (for an uptrend) or the direction of the trend will tend to reverse (bearish).
If you want to extend your forex trading, then Charles Dow’s theory will be very useful. However, if you want to use day traders or short-term traders this theory is not recommended because it is less applicable and traders will tend to act before there is a valid confirmation.
For traders who choose the long term and understand the different phases, it will be very important to find the right trade moment. However, a trader who understands 3 swing movement patterns and 3 phases will be very useful for you.
Meanwhile, the market that provides price discounts from news and rumors has no effect considering that almost a large portion of the forex market movement is controlled by several parties such as the central bank. Usually, the central bank always releases important issues to all the media in the world online.
Basically, an uptrend will be characterized by a consistent increase from the highest price to the lowest price. Thus, if the trend is up, but there is a decrease in the highest and lowest prices, it can be considered that the uptrend will end soon.