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- 1 Dow Theory is a foundational principle of technical predictions that envisions market trends.
- 2 The theory is originally constructed for stock market indexes and crypto to understand market patterns.
- 3 Market trends, discounts, indexes, and trading volumes are some core tenets of Dow’s working.
The entire world is shifting to automation and technology so why not the traditional financial markets? To modernize the sticks market and make trading effortless, Dow Theory was introduced to the financial world. Operating as a foundation of modern technical analysis, the theory is considered to as one of the most effective and relevant tools, majorly in the crypto market.
What is Dow Theory?
Dow theory is based on the idea of the financial market’s technical analysis and is mainly applied to the stock market indexes. Charles Dow introduced the theory in the late 19th century to examine market trends by analyzing price movements and trading volumes.
The theory revolves around the stock market analysis, but with time it created its unbeatable position in today’s crypto trading. Analyzing market trends and making informed trading decisions become effortless for investors and traders.
According to the theory, the market price shifts vitrine the whole actions and sentiments of all market participants. Examining the volume, price, traders, and trends helps in making a win-win game and predicting future price shifts.
Confirmation is one of the main pillars of the theory that notes that the shift of various market indices should establish the direction of the primary trend to confirm its strength. Apart from this, the theory is constructed on three core principles.
Core Principles Insights
As per the fundamentals, primary trend, minor trend, and secondary trend are the core principles of Dow Theory. So, let’s uncover the core principles of the theory in detail.
Primary Trend: This trend showcases the overarching trend of the market and is mainly for the long term. The trend lasts for months and years and stages the entire trajectory of the market. In a bullish trend, prices mainly rise over certain periods whereas in a bearish trend, prices decline. In the crypto market, technological advancements, and macroeconomic and regulatory factors affect the primary trends.
Secondary Trend: Short-term movements in the market represent a secondary trend and persist for a week to a few months. In an uptrend, it shows a temporary pullback whereas in a downtrend, it vitrine short-term rallies or bounces. In the crypto market, secondary trends are influenced by short-term events, market speculations, news, or any technical reaction.
Minor Trend: minor trends in the Dow Theory represent short-term oscillations that persist for a few days to a few weeks. These trends are hard to identify and analyze due to short time frame availability. In the crypto market, the trend is mainly used by intra-day traders or those who work with high-frequency trading approaches.
In addition to those trends, another factor that plays a significant role in technical analysis is volume. Volume helps in confirming the potential of the trend. An upsurge in volume alongside a primary trend represents decisive market consensus whereas a decline in volume showcases a weak signal.
The Complete Working of Dow Theory
Applying the Dow Theory in the digital asset market requires consideration and application of the core principles to examine the price shifts, volumes, and trends. Let’s understand the implementation of the theory in the cryptocurrency market systematically.
Trend identification and confirmation: Identification of the trend is the very first step and involves sideways, uptrends, and downtrends. In an uptrend, every low should be high and requires an examination of comparable patterns in crypto prices. Analyzing multiple digital assets within the same category helps in confirming the trend.
Volume confirmation: The next action to focus on is volume confirmation, which is essential for validating trends. A rise in trade volume during a downtrend or uptrend indicates the strength of the trend.
Crypto market dynamics: While applying the Dow Theory, individuals should consider factors like 24/7 trading availability, upsurge volatility, and market sentiments influenced by regulations and news.
Technical indicators and chart patterns: The last step is to use the technical indicators and charts to support the analysis. Individuals can use trend lines, moving averages, and oscillators to make a trade.
Conclusion
Dow Theory transformed the traditional financial market into an automated market, making crypto trading and investment much more efficient. The overall functioning of the theory relies on three core tenets that are primary trend, secondary trend, and minor trend. Trend identification, confirmation, volume analysis, market dynamics, and technical indicators help in the proper application of the theory in the crypto market.
FAQs
Who is the founder of Dow Theory?
Charles Dow, the founder of the Wall Street Journal, introduced the Dow Theory to the world in the late 19th century.
What are the core principles of Dow Theory?
Primary trends, secondary trends, and minor trends are the core principles of the theory.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
