I whave been thinnking lately about the technical analysis in general. I mean thinking about the very foundation of the technical analysis the Dow Theory. For those who are not really familiar with the Dow theory I suggest the Wikipedia link.
I write this because I had some very deep doubts about the Dow theory in general.
I think that the Dow theory is a particular case of market behaviour and not the general way the markets will have to behave in the future.
Here I would like to add two screen shots on the daily chart of the EUR/USD.
Here I will only include two tenets of the theory:
I use exerts from the Wikipedia article with some minor comments.
1. The market has three movements
(1) The "main movement", this is the primary movement or major trend and it may last from less than a year to several years. The main movement can be bullish (we can say we have a bull market) or bearish (bear market).
(2) The "medium swing", is a secondary reaction or intermediate reaction (that means a counter trend movement or opposite of the main trend movement) may last from ten days to three months and generally retraces from 33% to 66% of the primary price change since the previous medium swing or start of the main movement.
(3) The "short swing" or minor movement it varies with opinion from hours to a month or more. Those three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary reaction in a bullish primary movement.
In the modern talk we can say we have self similarity as nested elements. However at the time of Dow this vocabulary did not exist.
2. Market trends have three phases
Dow Theory asserts that major market trends are composed of three phases: an accumulation phase, a public participation phase, and a distribution phase. The accumulation phase (phase 1) is a period when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority demanding (absorbing) stock that the market at large is supplying (releasing). Eventually, the market catches on to these astute investors and a rapid price change occurs (phase 2). This occurs when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. At this point, the astute investors begin to distribute their holdings to the market (phase 3).
Look at the chart and in whic chart that holds true:
For the rest of the article ...
I write this because I had some very deep doubts about the Dow theory in general.
I think that the Dow theory is a particular case of market behaviour and not the general way the markets will have to behave in the future.
Here I would like to add two screen shots on the daily chart of the EUR/USD.
Here I will only include two tenets of the theory:
I use exerts from the Wikipedia article with some minor comments.
1. The market has three movements
(1) The "main movement", this is the primary movement or major trend and it may last from less than a year to several years. The main movement can be bullish (we can say we have a bull market) or bearish (bear market).
(2) The "medium swing", is a secondary reaction or intermediate reaction (that means a counter trend movement or opposite of the main trend movement) may last from ten days to three months and generally retraces from 33% to 66% of the primary price change since the previous medium swing or start of the main movement.
(3) The "short swing" or minor movement it varies with opinion from hours to a month or more. Those three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary reaction in a bullish primary movement.
In the modern talk we can say we have self similarity as nested elements. However at the time of Dow this vocabulary did not exist.
2. Market trends have three phases
Dow Theory asserts that major market trends are composed of three phases: an accumulation phase, a public participation phase, and a distribution phase. The accumulation phase (phase 1) is a period when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority demanding (absorbing) stock that the market at large is supplying (releasing). Eventually, the market catches on to these astute investors and a rapid price change occurs (phase 2). This occurs when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. At this point, the astute investors begin to distribute their holdings to the market (phase 3).
Look at the chart and in whic chart that holds true:
For the rest of the article ...