In part 1 of this series of articles: “Currency Technical Analysis Part 1: The Most Important Theory Ever” we discussed the general background to the Dow Theory.
Here we look at the three phases of the trend, and why currency-trading analysis must focus on the long-term trend - and how Dow Theory will help you capture every major trend.
Currency Technical Analysis – Market Discount
Dow Theory is based upon the classic view of currency technical analysis - that markets discount everything.
While Dow Theory accepts that the unexpected can always occur in the short term - the longer trend is unaffected - and if you think about it, this is true.
Central banks and geo political concerns can spike prices unexpectedly - but their influence tends to be short, rather than long term.
Currency technical analysis needs to be understood to make big money – and you need to focus on just the long-term trends.
The market reflects all available information - everything there is to know is already reflected in the markets - through the price.
Prices therefore represent the total of all the hopes, fears, and expectations, of all the participants in the market.
Interest rates, presidential elections, employment, consumer confidence - and everything else, is already priced into the market.
Short Term Moves should NOT be traded
The unexpected will often occur, in any form of currency technical analysis - but this will normally affect the short-term trend - but the primary trend will remain unaffected.
With this in mind, Dow Theory accepts limitations - but if you focus on the longer term trend, and trade with the odds in your favor, you can be a winner.
Look at any currency chart and you will see:
In currency technical analysis, primary trends tend to last for months or years.
This is why Dow Theory is so applicable to currency trading – this is not a day trading theory - which is a mugs way of trading currencies.
The Three Phases of a Trend
Dow and Hamilton identified three types of price movements:
1. Primary Movements
2. Secondary Movements
3. Daily Fluctuations
Primary Movements
Primary moves generally last a few months to several years. These primary moves represent the broad underlying trend of the market – the health of the underlying market in currency trading. These are the trends that currency traders should focus on, as they are the trends that yield the biggest profits.
Secondary Movements
Secondary Movements, also known as reaction movements generally last a few weeks to a few months - and move counter to the primary trend. These secondary movements are moves that can be affected by such things as, central bank manipulation, and geo political events.
Daily Fluctuations
Daily fluctuations generally move with, or against the primary trend - and last from a few hours to a few days - but usually not more than a week. These daily fluctuations moves, are really random - and are un-tradable in currency markets.
Currency Technical Analysis for the Serious Trader
Dow Theory provides a mechanism for investors to use that will help remove emotion from trading, and focus on the long-term trends.
Hamilton warned that investors should never be influenced by emotions. In the technical analysis of currency markets, you need to be objective and focused - see what is there, and not what you want to see.
Dow Theory provides a mechanism in the technical analysis of currency markets, to help you stay focused and disciplined at all times.
The methods for identifying the primary trend are laid down - and are NOT open to interpretation.
Reflecting Market Psychology
If you want a clear view of why Dow Theory works, then you need to know how trends build - and this is explained in 3 phases by:
. Accumulation
. The Big Move (excess and despair)
. Distribution
If you understand how these phases work in currency technical analysis, then you are well on your way to making big profits.
We will discuss these three phases - and the logic behind them, in part 3 of this series of articles.
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Article Source: http://EzineArticles.com/?expert=Stephen_Todd
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