Do you want to trade anything successfully? Studying the Dow Theory is the first step for any expert trader. If you are new to the cryptocurrencies world and the underlying trading opportunities, then equip yourself with a lot of education.
It doesn’t matter if you trade futures, forex, stocks or even crypto-currencies like bitcoin; The Dow Theory is your best compass to navigate the price movements on any chart and time frame.
Therefore, by studying the Dow Theory, you are accessing the fundamental foundation for all modern technical analysis.
Also, everyone knows that trading theory and education can be mundane and boring but making money is not, so, making money is the primary goal of trading. The main thrust of this article is to explain Dow’s theory, its six tenets and how you can use them for understanding cryptocurrency trading signals so that you can make better investment decisions.
NB After observation of the trading markets, H. Dow came-up with six tenets which traders today use as the foundation of all technical analysis.
With no further a due let’s talk about the Six Tenets of the Dow’s Theory
Tenet #1 There are Three Types of Market Trends
In Dow’s theory, the primary trend is the main trend of the market, which makes it the most vital one to consider. This is because the dominant trends are the one which affects the movements in stock prices. The primary trend will also influence the minor and secondary trends within the market. So, Dow figured that a primary trend will usually last between one and three years but could differ in some instances.
Regardless of trend length, the primary trend remains in effect until there is a confirmed reversal
Therefore, when reviewing trends, one of the difficult things to figure out is how long the price movement within a primary trend will last before it reverses. Hence, the most crucial aspect is to identify the direction of the trend and to trade with it, and not against it, until the weight of evidence proposes that the primary trend has reversed.
A secondary trend moves as a correction to the primary trend or in the opposite direction of the primary trend. The duration of this trend can last from a couple of days to several months.
For instance, a primary upward trend will be composed of secondary downward trends. This is the movement from a successively higher high to a successively lower high. In a primary downward trend, the secondary trend will be an uptrend. This is the movement from a successively lower low to a successively higher low.
● Short Swings
This type of trend also referred to as a minor trend. The minor trend is generally those moves that go against the direction of the secondary trend or the corrective moves within a secondary movement. Due to its longer-term focus and the short-term nature of Dow theory, the minor trend is not of primary concern to Dow theory followers. However, this does not subscribe that it is entirely irrelevant; the minor trend is observed with the large picture in mind, as the short-term price movements are a part of both the secondary and primary trends.
This trend occurs as a result of temporary opinion or some news and can last from a couple of hours to a month.
Tenet #2 There are Three Phases to All Market Trends
● Accumulation phase
Accumulation phase is the stage when investors such as professional analysts can analyze and try to predict the future. It will also allow them to identify opportunities to buy currency at low prices. In other words, this stage is when insider information holders and good analysts buy a coin at low prices.
● Public Participation Phase
This phase is when the public starts coming to the terms of a currency’s value and starts investing in the currency in the hopes of creating quick profit causing the coin’s price to rise. The relative mood in this phase is hope and optimism.
● Distribution Phase
Distribution phase is when investors will finally get their coins and start selling them at its highest price.
Tenet #3: Markets are Efficient
What it implies is that the information and news about cryptocurrencies or a coin will reflect in the price variations of that coin. Hence, technical analysis can easily help in covering information gap. In this light, cryptocurrency price charts come handy in doing the analysis.
Tenet#4: Market Averages Always Confirm With Each Other
What it simply means is that if the averages of the market reflect a different trend, then there’s hardly any trend.
Tenet #5: Trends are Confirmed Always by Volume,
When a coin is facing an uptrend, then the buying volume will rise. SO, an increase in sales volume is a sign of a downward trend.
Tenet #6: Until There is an Explicit Signal, a Trend Cannot Change
Until there’s a symbol indicating reversal, the trend will not change. For instance, when a trend is bullish, it will have a higher low and higher high. There should be a lower low for the trend to move which is confirmed by a lower high.
Therefore, when a trend is bearish, it will have lower low and lower high. Hence for it to change, there should be some confirmation by a higher low.
In conclusion, learning the Dow’s Theory is very crucial as a professional trader as it is a vital tool that can help you in the timing of an investment decision. Hopefully, this article will educate you in some way.
Ar you going to profit in cryptocurrency trading by using Dow’s Theory? Well, that is entirely up to you. If you are willing to dedicate time and learn the theory it can almost guaranty you profits.