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Hi, this is Raghee Horner and this is a walk-through one of the foundational concepts behind my
personal trading and a concept that is nearly a century old and that is the themes of Dow
Theory. So, Charles Dow created these ideas behind
how he felt the markets moved and therefore also the psychology behind the movements.
There are six basic themes of Dow Theory and this is how I have come to know them and this
is how I have come to use them in my trading and how they have also manifested in my development
of the 34EMA Wave and my GRaB candles both of which are available on the Interbank FX
Trader 4 platform. There are three main movements of the market
and Dow Theory talks about these movements in short swing, in medium swing and a main
movement. Now, I do not use all the themes of Dow Theory. I am going to focus in on the
ones that I feel are the most helpful to traders especially in the Forex realm and using the
tools that I teach people how to use. I am interested in the main movement as the primary
trend. You might hear me refer to a directional bias or the dominant psychology of the market
and that is absolutely influenced by this first theme which is that main movement of
the market. Market trends - so we take that main movement.
Market trends have three phases and within the way the psychology works if you are looking
at it through the eyes of Dow Theory, prices can move sideways narrow range that is accumulation
they can move up higher, they can also move down lower even though Charles Dow did not
refer to this as one of the main phases and they can move in a much wider, more volatile
fashion which is known as distribution. Here on this chart of the USD/CHF, you can see
the movement lower which we can refer to as markdown or a downtrend. You can see the movement
higher and then you can see the wide range where there is not a dominant trend although
there is organization of sentiment and momentum that is making a wide range.
Dow Theory was developed using the stock market and of course, that was a bullish bias to
the stock market so the next theme that the stock market discounts on these we can just
look at that as the overall market, the market discounts all moves. And the markets are a
forward-looking vehicle whether you are looking at Forex, whether you are looking futures,
whether you are looking at equities. Everything is always forward-looking and even though
price action will digest or incorporate discount this information as soon as it is available
there is also this type of forecasting where we look at the expectation that we have for
news that is scheduled to be released or broader economic events that are scheduled to occur
and we begin to incorporate or discount our expectations into price action. So again,
it is about discounting all the news even before it has necessarily been confirmed.
There are some other aspects of Dow Theory. And the ones that I use of the remaining four
that market averages must confirm each other well you might ask how does a Forex trader
use this information. Well, market averages can be viewed in many ways as a correlation
even between pairs, as a core relation between futures contract. It is not something I am
going to get into in-depth here but there should be a certain amount of cooperation
between the markets that affect one another. Another aspect or theme of Dow Theory is that
trends are confirmed by volume. Well, we can look at volume or participation differently
than a stock or futures trader because there is not really a signal exchange for foreign
exchange, what we look at instead could be the expected rhythm of the market. We could
look at the volatility that comes and goes with each financial center. Remember that
Forex is the largest market in comparison to futures and equities. So, when I look at
volume, when I hear, I envision participation and to measure that we have an excellent tool
here in IBFX called power stats. We have videos on this but that is one of the ways that I
will confirm trends. The last theme is that trends exist until
there are signals to prove that they have ended. Well, it is a pretty broad basic statement,
is it not? Well, we can use technical analysis and charting tools to determine when a trend
has ended but one of the tools that I used consistently is the 34EMA Wave and GRaB candles
and I can identify trends with the organization of similar colors. For example, the steadiness
of the red on this DLE chart of the USD/CHF or the steadiness of the green as well as
the angle of the 34EMA Wave. So, that is how this Forex trader takes the ideas of Dow Theory
and applies them to the Forex market.