Introducing Dow Theory
Charles H. Dow founded Dow Jones & Company.
Dow, a Wall street Journalist, believed that by analysing the overall market, it was possible to gauge business conditions and identify the direction of major market trends and the likely price direction of individual assets. Dow is considered, by many, as the father of Technical Analysis.
CyberTrade believes that its trading system must be based on an excellent understanding of Dow theory and Technical Analysis. The main components are described in this section.
1. The market discounts everything
Dow theory is based upon the Efficient Markets Hypothesis (EMH) which states that assset prices incorporate all available information.
2. Indicies must confirm eachother.
A trend is only established when major indicies confirm eachother.
3. There are three types of (nested) market moves.
a) Primary moves which last a year or more (Bull or Bear markets),. b) Medium swing. secondary trends, such as pull back or rally. c) Short swing - less than three weeks (noise)
4. Volume must confirm the trend.
Volume should increase if the price is moving in the direction of the primary trend.
5. Primary Trends have three phases.
Bull market: Accumulation, Public Participation and Excess phases
Bear Market: Distribution, Public Participation and panic/despair phase.
6. Trends persist until a clear reversal occurs.
Reversal in primary trends should not be confused with a pull-back or rally.
Cybertrade
Dow Theory - Main Components
CyberTrade
CyberTrade - Technical Analysis
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Current Market Structure
Market structure can be understood by analysing the following indicators:
- Price Trennds
- Chart Patterns
- Volume
- Momemtum
- Oscillators
- Moving Averages
For Trading, it is vital to gauge the overall trading context, before placing trades.
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likely price action
Adherents to Dow Theory, trade within trends.
It is therfore vital to recognise the trend and recognise when there is a trend reversal.
Within the trend, Traders recognise secondary trends and may count Elliot waves within such trends to help identify low risk opportunities and set profitable entry and exit points.
Trade Entry and Exits
Elliott Wave Theory and Fibonacci analysis are used by traders to find optimal entry and exit points.
Fibonacci analysis can also be used to identify trades having a good risk/reward ratios.
Overall, CyberTrade believes that it is important to have a systematic process, which flows logically from overall market analysis to trade entry and exit.
Dow Theory - Discounting.
Asset prices incorporate all available information.
In practice this means that everything about a cryptocurrency is already priced-in.
This includes Fundamentals information (Network transactions, transaction volume/value, growth rate etc). It also includes Market sentiment information in the shape of tweets and/or likes, for example.
Price also accounts for the quality of any management team and its track record.
Dow Theory - Market Moves.
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Dow theory highlights three market moves.
Firstly, primary trends such as bull or bear trends,. These last for a year or even for several years.
Secondly, secondary trends such as a pullback (bear market) or a rally (bull) market) work against the primary trend. Secondary trends last between 3 weeks and 3 months.
Thirdly, minor trends last for less than three months and are mainly noise.
Understanding that for example, the market trend is downward but that a bear pullback has started can be invaluable market knowledge.
Cyber Trade also advocates some human confirmation of trends and trend reversals, to ensure the trading system properly understands the context of the market, especially when hit by unexpected events.
Dow Theory - 3 primary trend phases.
Dow Theory states that a primary (Bull/Bear) trend will have three phases.
A bull trend starts with an accumulation phase, when people in-the-know, start to accumulate an asset.
In the next phase, the public becomes aware of the opportunity and the 'big move' is known as the public participation phase.
Finally the 'excess' phase is where late comers join the action.
In a bear market the phases are known as distribution, public partition and panic.
Dow Theory - Index confirmations.
A trend can only be said to exist if major indices are in agreement.
Traders should not presume that a trend is established while major indices are giving mixed signals. In that case there is no clear trend.
Dow Theory - Volume must confirm the trend.
Volume should rise if the price is moving in the direction of the primary trend and fall if it is moving against it.
Low volume, signals weakness in the trend.
In a Bull Market, volume should increase as the price rises and fall during a secondary pullback (a trend reversal caused by bearish activity).
Dow Theory - Trends Persist.
A trend can only be said to exist if major incicies are in agreement.
Reversals in primary trends should not be confused with secondary trends.
It can be difficult to distinguish whether an upswing in a bear market is a reversal or a rally that will be followed by lower lows.
Dow Theory urges caution and advises that a reversal needs confirmation.
