For the first time about the Dow theory, the world heard closer to the end of the XIX century. The founder of the theory at that time was just a newspaper editor and one of the founders of the company of the same name. The Dow Publications were subsequently supplemented by W. Hamilton and J. Schaefer, who finally defined the main tenets of this theory.
Today, the axioms of this theory are applicable to technical analysis, which is actively used to work in financial markets, including currency.
The basic tenets of the theory are as follows:
1. The price on the market is its reflection. That is, any information, events currently taking place in the world are displayed on the price change.
2. Existing market indices take into account everything. That is, any factor that can somehow affect the demand or supply in the market will be reflected in the fluctuation of the dynamics of the index. Despite the fact that there is no possibility to predict these factors, the market instantly takes into account their presence, changing the dynamics of the indices.
3. Price makes directional movements. These movements can have both upward and falling trends. In the case of an uptrend, each next peak and the subsequent decline is higher than the previous one. With a falling trend, every next peak and decline is lower than the previous one. Accordingly, in the case of a horizontal trend, the peaks and dips in all cases are at the same level.
4. The main trend has three phases: the birth, continuation and reversal.
In the first phase of the transaction begin to be committed by the most prudent traders. They have already analyzed all the negative information and therefore they predict in advance the possible receipt of profitability from operations.
In the second phase, the majority of traders see the first steps to conclude transactions and decide to do the same.
In the third phase, traders rush to lock in profits and close deals, as the market becomes panic and the amount of speculation actually begins to inflate a soap bubble.
5. Trading volumes in the market confirm any trend. Under the volume refers to the amount of a certain currency with which transactions were made per unit of time. Accordingly, the relative increase in trading volume indicates an increased interest in this instrument, its decrease indicates a decline in interest, and therefore it is necessary to close deals.
Thus, we briefly reviewed another theory of technical analysis, which, together with the main tool, is quite capable of bearing fruit in the foreign exchange market.