Theory Of Dow Jones. The Dow Jones index

3. Forex technical analysis

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The first mention of the possibility of forecasting the future price movements on the basis of the results of the previous trading emerged in the late XIX century in the Wall Street Journal. This note was already then well-known Charles Dow - Creator of the popular nowadays the Dow Jones index. Theory, created Dow, exists to this day and is called : « the Dow ». The method developed and improved up to the 70-ies of the XX century. With the advent of computers easier to not only read, but also to display the calculations in graphical form. Tracing back directly and indirectly from the Dow theory, technical analysis absorbed such principles and concepts of this theory, as the directional nature of price movements", "rates take into account all available information", "confirmation" and "divergence", «Volume as a mirror of price changes and support/resistance». And widely spread the Dow Jones industrial index is a direct descendant of the Dow theory.

price Forecasting in technical analysis is based on indicators of the previous auction. These trades greatest interest is caused by two.

the First is the price of assets. Rates are clear, their values are easy to find private trader. This makes the index of the price is most important to work.

the Second trading volume-total amount of payments for the time period of interest transactions, expressed in any currency. These values are more difficult to find, but it is possible.

these whales price, trading volume - based theory of technical analysis. Like any theory, it has its postulates. Three main read as follows :

1. Movements in asset prices into account all factors. This means that the price is reacting on all external factors, whether the statement of the American President, information about the level of inflation in Mexico or the hurricane in California. According to the Dow theory, any factor that may affect the supply or demand, invariably reflected in the dynamics of index (prices). Of course, earthquakes and tsunamis are unpredictable, but they are immediately taken into account by the market and affect the dynamics of prices.

2. Prices move directionally. It means that price movement is not chaotic, and come in a certain direction. This direction is called trend. Trends are of three kinds : bullish (up), bear (down) and lateral (neither decrease nor increase of the course).

3. History repeats itself. "The key to understanding the future lies in the study of the past ". The fact that certain configurations on price charts tend to appear steadily and repeatedly, and in different markets and at different scales of time, is the consequence of some of the behaviours of the human psyche. There are three different approaches to the analysis of the graphs. First - surface subjective. It is based mainly on intuition. It's the usual « poke ». It neither requires rigorous analysis, nor justification, therefore, most traders work on the simplest level. Unfortunately, in favor of simplicity and ease they sacrifice logic. The second approach is connected with the creation of market indicators that help to determine the status of oversold and overbought market. Although many traders at least partially use this type of analysis, they are usually limited to only the most famous indicators and adhere to the generally accepted ways of interpreting them. In this work there is no creativity. These traders do not try to create your own indicators or improve existing ones. In addition, they often associated with fashionable indicators exaggerated expectations and do not notice their disadvantages. The most effective and valuable is the third approach is the development of trading systems that can generate signals of buying and selling. However, not all analysts have sufficient education, experience and desire to constantly hone their skills.

Initially, the principles set forth in Charles Dow, were used for the analysis of the created us indices, industrial and rail. But with the same success the majority of analytical conclusions Dow can be applied on the financial markets.

the Main provisions of the Dow theory:
1. Indexes account for everything. According to the Dow theory any factor capable of or otherwise affect the supply or demand, invariably reflected in the dynamics of the index. Of course, these events are not predictable, however, they are immediately taken into account by the market and reflected in the dynamics of indexes.

2. On the market there are three types of trends. When the trend is ascending each subsequent peak and each subsequent decline higher than the previous one. When a downward trend, every subsequent peak and fall lower than the previous one. During sideways trends, each subsequent peak and fall is approximately at the same level as the previous ones.

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Dow also identified three categories trends: primary, secondary and minor. The greatest importance it attached to it is the primary or main trend that lasts more than a year, sometimes several years. Secondary or intermediate trend, adjusts from the main trends and usually lasts anywhere from three weeks to three months. Such mid-course corrections are from one to two thirds (often half the distance travelled prices during the previous (major) trends. Small or short-term trends last three weeks and are short-term fluctuations in the framework of the intermediate trend.

3. The main trend has three phases. The first phase, or the accumulation phase, when the most far-sighted and well-informed investors start to buy, as all unfavorable economic information market has already absorbed. The second phase starts when the game included those who use technical methods for tracking trends. Economic information becomes more optimistic. Trend enter their third or final phase, when the action comes to the General public, and the market starts boom, fueled by mass media. Economic forecasts are optimistic. The volume is increasing speculation. Here the informed investors who "built up" during излета of the previous trend, when nobody wanted to "accumulate"start "distribute". Trend comes to an end.

4. Indexes must confirm each other. Here Dow meant industrial and railway indexes. He believed that any important signal to increase or decrease the market rate should be reflected in both indexes.

5. Trade volume must confirm the trend. The volume should increase in the direction of the main trend.

6. Trend operates until it clearly signals that it has changed.

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