Forex technical analysis for beginners. Dow Theory
Technical analysis can be defined as a method of predicting market prices which is based on mathematical calculations and not on economic indicators or news.
This method was created to make profits on the stock and currency markets. Originally, technical analysis was divided into several different approaches and it was only in the 70s that all these approaches were merged into a comprehensive method with common psychology, axioms and principles.
Forex technical analysis is a method for predicting likely price movements using charts that depict the history of fluctuations. The practical use of technical analysis defines several axioms.
Technical Analysis Axiom #1. Every pricing factor - economic, political, psychological - has been taken into consideration when forming the price. As soon as news is released, the market chart will begin to move to reflect the new information.
Technical Analysis Axiom No. 2 The price movement has its own direction. This axiom has become the basic one in all methods of technical analysis. The main purpose of Forex technical analysis is to: determine a probable movement (trend in other words), and use this data in trading. Dow's definition says that in a bullish trend, each successive peak and trough will be higher than the previous one. This definition has become the main and fundamental principle of technical analysis. A trend is divided into three types: bullish (upward movement), bearish (downward movement) and flat (sideways movement). Each of these trends is rarely encountered in its pure form.
A certain trend is considered correct until there are signs that signal a change of direction. According to Dow, the trend continues despite market noises. In real practice, however, it is not so easy to determine whether a given reversal is the starting point for a new trend or just a pullback. Modern technical tools make it easy for traders to determine this. However, different traders interpret this data differently.
Technical Analysis Axiom No. 3 Analysts predict movements based on certain rules that have worked in the past. These rules can be applied in the future as well, as the price is shaped mainly by human psychology. Here are the fundamental principles of Forex technical analysis:
Price takes all factors into account, so all necessary information can be obtained by studying the charts. The main purpose of technical analysis is to determine the trend at its initial stages and then use this data in working forex strategies. And the final thought is that if something worked in the past, it is likely to work in the future.
Dow Theory in Classifying Trends Dow Theory distinguishes between three types of movements: "Global (long-term) trend", "Medium-term trend" and "Short-term trend".
"Global (long term) trend" is the main one as this trend can last for several years. "Medium-Trend" is essentially a correction of the main "Global Trend" and can last from ten days to three months. "Short term trend" is a slight fluctuation in movement. This type of trend can last up to three weeks.
Many modern technical analysts consider the Dow Theory trend definition as the basis of modern technical analysis.