Of course, it was Charles Dow who presented the technical analysis first time. He carried out renowned Dow Jones, created world’s leading agencies for financial information and started the printing of the inclusive financial data. He has written many articles about the financial markets.
His suggestions that were described in his publication were later summarized. These are called Dow Theory and turned out to be basic for the latest technical analysis. Though he explained the processes which were occurring at any securities market, but his theory is appropriate for the financial markets as well.
Charles Dow had paid attention to the renowned principles, like, market’s process cyclical character, price change character, and relations between the exchange rates and trading volume.
Charles Dow theory bases on six main tenets. That is being mentioned underneath.
I. The market has had three kinds of movements
Charles Dow confirmed that trends could be sub-divided into long-term, Intermediate and short-term trends. Every kind of trends are in order an upwards or downwards. The upward trend shows that every high or low is located higher than preceding one. Whereas, the downward trend locates lower than the preceding one.
The long-term trends might end in less than one year to many years. The Intermediate trend generally ends in three months. The short-term trend’s period is less than 3 weeks.
II. Market trend has had three phases
A public participation, a distribution, and an accumulation phase.
The public participation phase starts whenever technically oriented and active traders take part. Such traders follow the market trend. This phase is escorted by the price changes increasing of the trends. Whereas in distribution phase experienced investors start the new accumulation and public gets fully involved. During the accumulation phase wise investors start trade operations with sufficient capital. That seems against the market opinion.
III. The stock market average should confirm each other
As per Dow opinion, the transportation and industrial averages should confirm the present trend and supply signals of U-turn with minor divergence in time.
IV. Markets discount everything
Charles Dow assumed that the market react very swiftly to any information. A factor that may affect the demand and supply is at once reflected in the dynamics of averages and price.
V. Trends are confirmed through volume
Whenever the prices move within the core trend the trading volume gets increased. Otherwise the changes in the price do not reveal the actual market opinion.
VI. Trend exist unless definitive signals confirm that they have finished
A trend must be changed in every situation. But if the price change signals are not clear, then, this fact may be regarded as a temporary corrective movement signal. But it will not be taken as an indicator of U-turn in the trend.
So, it is quite evident to us that some parts of these suppositions are applicable to any Forex market. More than hundred years have passed but the ideas of Dow are still relevant and the reality that the latest analytical tools emerged.