Theory Dow - Guide Part 37 Other.
We will find this in the Dow Theory, a sequence of principles that summarizes the entire technical study. The indicators and tools studied in this field only serve to aid these principles. Dow asserted that the market has 3 trends and 3 stages, which we are going to take a closer look at. Concepts as relevant as accumulation, distribution, public collaboration and volume were already used by Dow, constituting the foundations of the technical study. A century later, analysts take as their main axis all the aforementioned principles that Dow explains in his theory.
Who was Dow?
Charles Henry Dow was an economist born in 1851 ( Sterling , Connecticut). In addition, he has been a journalist, covering economic news in different newspapers.
At the Kierman news agency he met a fellow profession who would later become his partner, Edward David Jones. The two founded a financial consulting agency together with Charles Milford Bergstresser . The agency was called Dow Jones & Company.
Dow has also been a founder of the well-known financial newspaper The Wall Street Journal , along with his partner Edward Jones. Soon after, it formed the Dow Jones Industrial Average (DJIA 30) stock index , as well as an index for transportation organizations. It should be remembered that at that stage the primary transport was the train.
As if all that were not enough, Dow has been the founder of the foundations of the technical study as we know it today. What we call "technical analysis" has its beginnings in the principles today we are going to try, which were the work of Dow and linked together make up his theory. This theory has been an initiative for the first time in the early twentieth century.
The Dow Theory is still considered the cornerstone in technical study analysis. This is the reason why a technical analyst should know it and keep it continually in mind.
The stock indices that Dow brought to light were considered barometers of market activity and became an instrument of fundamental importance for analysts, even though this has already been years after his death.
Dow, unfortunately, never abandoned a written work. Only what remains of him were a sequence of articles published in The Wall Street Journal . Dow's theory was published in 1903 (by SA Nelson), one year after his death. It has been a compilation of his essays in a book entitled "The ABC of speculation with values." It was there once that for the first time the "Dow Theory" was used as an expression to conceptualize his beginnings of study.
The Basic Principles of Dow Theory
Next, we are going to look in detail at the 6 principles that unite the Dow Theory. You must read them carefully because this is the fundamental reasoning that will help you to invest successfully.
First start: Stockings discount everything
Financial markets reflect in their cost all the components that are generally affecting supply and demand . This is the primary reason why technical analysts rely on chart analysis. All events, their reasons and their aftermath are reflected in the cost. Charts are the main working tool of a technical analyst.
The cost is important in everything that happens, even before it happens. The market is a huge mass of informed people who act out of expectations. Before the production occurs, the market can discount it in its cost.
Just by diagnosing the trend of the prices in a financial asset we will be able to deduce what has happened, what is happening and what can (probably) happen in the future.
Once Dow talks about measures it has to do with stock indices. Recall that the Dow Jones Industrial Average (DJIA 30), as well as the train index that he himself designed are nothing more than a simple arithmetic mean of the prices of the most representative securities listed on the stock market (it is not a weighted index) .
Let's review what has been observed, if the cost of an asset reflects each of its reasons, that is, all the fundamentals that support supply and demand . In addition, an index is an average of the primary assets that are listed on a market. Only by solving the trend of the stock index will we have the possibility of having an initiative in the case of the general market and in a certain way of the economy (financial markets are a leading indicator of the economy).
For thus the term "middle discounted everything" is neither more nor less than a way to mention that the prices of stock index Dow Jones remained warning of what occurred, which happens and, for those who know how to interpret the graphs, which can possibly happen.
This beginning can also be applied to the graphs of the assets taken individually, the cost of the asset discounts the components that are affecting it. Everything is drawn on a graph. In other words, technical exploration. No more no less.
Second start: The market has 3 trends
In an uptrend: Ascending highs and also ascending lows. Each higher surpasses the previous one, the minimums are higher and higher.
In a downtrend: descending highs and also descending lows. Each low is lower than the previous one, the highs are getting lower and lower.
In a lateral trend: equivalent highs and lows. They do not ascend or descend. The market moves in a range.
Dow defined an upward trend as:
"A situation in which each successive recovery closes higher than the high degree of the previous recovery (ascending maximum), and each successive low degree of recovery also closes more than the low degree of the previous recovery (ascending minimum)."
As we can see, Dow has already taken care of conceptualizing trends. Of course, in a trend there are impulses and setbacks, they are the laws of action and attitude. Dow was clear that these universal laws of action and attitude applied to financial markets just as they apply to the rest of the world (physical laws).
Promotion (action): Intense displacement that provides the direction of trend.
Recoil (reaction): Shorter and less violent movement. It is a "free time" of the promotion .
The two movements make up a trend. The impulses have to be bigger to the corrections. This will make the market make higher and lower highs and lows (or lower, if we are facing a downtrend).
"Bull trends are sequences of ever higher highs and lows.
On the other hand, the downward trends make up increasingly lower highs and lows "
Once we have observed that Dow has been the individual who established the trend term and how he defined it, we are going to consider how he compared the trends with the movements of the ocean. Just like there are tides, waves, and ocean waves, there are 3 trends in a market:
The primary trend
The secondary trend
The minor (or tertiary) trend
The tides rise and fall, this causes the waves to enter the beach more and more if the tide is rising (or less, if the tide is going out). We have the possibility to equate the primary trend with the tides. The structural trend of the market.
The primary trend has a preeminent duration to the year, they are the monumental background trends. Sometimes they last more than a year (they can last several years). However , we will know how to identify it by its duration. As we will explain, there is no written rule about the duration of a trend. If a trend is rigid for a little less than a year, you will have to use common sense and be flexible with this rule.
On the other hand, the secondary (or intermediate) trend is itself the corrections that are generated in the primary trend and that are part of it (reversals of the primary trend). He described it best:
We have a primary trend, suppose it is bullish . According to the universal laws of action and attitude (which are also used in financial markets as well as in all universal resources), this primary tendency will have moments of encouragement and moments of correction.
These trends that make up the impulses and corrections of the primary trend are called “secondary trend”. Rather, we are talking about corrections, since being the primary upward trend, its impulses are confused with those generated in that one.
If the trend were downward, it would work the same, the corrections (in this upward situation) could be those that give shape to the secondary trend. The downward impulses of the secondary trend would be confused with those of the primary trend, since both trends go in the same direction and one is incorporated into the other.
In this way, since the secondary trend is really the impulses and corrections that make up the primary trend. However, it is only spoken of in the corrections (in the opposite sense of it).
Secondary trends usually last from 3 weeks to 3 months and go back between 1/3 and 2/3 of the previous promotion. Even though, more frequently, the setback is 50% of the previous promotion. We review everything as it is a fundamental criterion.
Corrections of the primary trend (secondary trend):
They usually last from 3 weeks to 3 months.
They can arrange between 1/3 and 2/3 of the previous promotion.
More often than not, the correction is 50% of the promotion.
In the end, we have to see the minor trend, which is the shortest. They are fluctuations of the secondary or intermediate trend (if they are corrections of the intermediate trend, they move in the same direction as the primary trend).
They tend to last less than 3 weeks, even though there is no rule that dictates how rigid a trend (whatever level it is). The time limits that are indicated (better commented than indicated by the Dow itself) are only indicative scales. There is a certain margin, moderate and prudent, in which the analyst will have to use common sense.
At the end of the day, the market moves according to 3 trends, one in the other. If we are able to understand this well (but well enough) and to detect them effectively, we will have a lot to win when it comes to examining financial markets and investing money in them.
Third beginning: The primordial tendencies possess between stages
Once we have seen the 3 trends that have the possibility of occurring in the market, we must find out the stages of all of them, even though Dow considered these stages for the primary trends, since in these trends these stages are really well differentiated.
There is no doubt that the stages that we are going to examine are granted in all grades, they work better the higher the level of the trend.
The 3 stages of the market, or of the trend (mainly the primary ones) is a criterion of great importance to understand the performance of cost movements (without neglecting the other principles and in a mixture with them).
First stage: Accumulation
This stage represents the purchase made by expert investors, they are the ones who possess the accumulation power (capital and means) and most of the time they work in a syndicated way to triumph accumulation force.
Assuming that the above trend is downward, the market will reach a cost level at which the most seasoned investors think they are fit to start their purchases.
The buying campaign begins, the market has already discounted each of the unfavorable news that caused the price to fall. Purchases are made discreetly. If all the expert investors (and their huge accounts) suddenly entered the market, the stock would turn sharply (in situations the market turns sharply, however in primary trends it is more possible that an accumulation stage will be generated before).
This stage is characterized as the market goes from an evidently downward trend to a lateral stage or draws a head of turn that technical analysts know. The smart money (the professionals) is buying secretly, they keep withdrawing occupations from the market and once the demand increases there cannot be enough supply to satisfy it. They take advantage of the fact that fear is still rife and they buy once the whole planet sells. As the cost does not skyrocket, rather it stabilizes.
In short, the first stage of accumulation is characterized by a purchase in monumental chunks once the market is at the correct cost grade. The cost does not rise because there is a fund supply and the campaign is really well planned. Expert traders are actively involved in this stage.
Second stage: Public collaboration
Once the professional traders have accumulated all the existing paper, the market is ready to go up. The bad news that marked the downside, and that was probably still on the minds of investors during the accumulation phase, is beginning to dissipate.
The environment becomes conducive to shopping. The change in conditions in the economic paradigm was previously known to professionals, for that reason they accumulated while the rest of the mass (a financial market can be defined as a psychological mass) sold their shares (or whatever asset it was).
At this point, remember, a large part of the assets are outside the market, in the hands of professional operators. They have withdrawn supply and demand begins to increase. The public wants to participate in the market (en masse), the news. There is no such offer in the market for the amount of demand begins to surgi r !
Professional traders have restricted the existing floating supply. The effect is very clear, and premeditated; prices start to rise. This is where the true trend forms, the first impulse arises.
Obviously, this impulse will contain its corresponding correction which, as we will recall, can be between one third and two thirds of said impulse (although it will most likely correct half). But, as we have also seen, these corrections do not alter the primary trend (the highs and lows are still higher). The corrections form the secondary trend, which will also have its minor corrections (minor trend).
This is how the public participation phase is formed, through impulses and setbacks.
Third stage: Distribution
As costs go up and up, as a result of mass public collaboration (previous phase) and the economic news is getting higher and higher, the economic environment becomes overly optimistic (some define this sentiment as greed, rather than optimism; they are not wrong). The whole planet begins to talk about the market, the level of speculation increases, the public media echo that everything is better than ever.
The population wants more and more, the cost seems overwhelming. Credit and excessive leverage are even used to avoid this possibility of making money.
It is at this moment, when there is a massive demand, it is once the experts decide that the moment to sell has arrived. They have to take advantage of the situation and destroy their portfolios, or then it will be too late. They have the possibility of obtaining high cost counterpart without their huge sales causing the market to crash. It is a time in which there is demand to cover the large proportion of supply that is going to be launched.
Therefore, the distribution stage begins. Release the paper that they still have accumulated at the hands of the masses. Now or never.
As in the first accumulation stage, this stage should be entirely discrete, they know that once they dispose of the asset the cost will begin to discharge due to oversupply in the market. They have good analysts, contacts with the public media and each of the elementary instruments to manipulate (in the legal sense) the cost of the asset.
We are not talking about a manipulation of assets, they manipulate the masses. To the public. They play on their fear and their greed. Your buying and marketing campaigns remain designed with the accuracy of a Swiss watch. The market has reached acceptable cost levels and it is profitable to market your portfolio assets. In addition, there is a trade-off. The market makes a turn boss, it could be a side range or a famous turn figure.
When they have shared the asset, the same thing happens as in the second stage, but in the opposite direction. there is a large proportion of paper in the market (supply) and it often happens in the company of a lack of demand since we are finally in the period and the media, which until recently published good news, abjures what has been published. The economic paradigm changed, the experts knew that this was going to happen before the case was made public.
The effect is a clearly marked downtrend. Also, with built-in panic. It is the same stage of public collaboration only in the opposite direction.
After the crash, the game begins again. In this way the financial markets work from their reality.
Fourth start: The means have to confirm each other
Once we talk about averages, in this environment, we are referring to stock indices. The indices were created by Dow by calculating an arithmetic mean of the price of the most representative securities in a financial market.
In the era in which Dow gave birth to his theory, there were only 2 indices (established by himself). Dow was referring to the Industrial Average (the popular Dow Jones Industrial Average ) and the Train Average (an index that is now extinct).
There are currently a larger number of stock indices, even in the same market. However, the spirit of this beginning remains: The affirmation of signals by means of correlated markets.
Dow really wanted to mention with this that the averages should offer the same signal. The indices therefore have to confirm each other. He does not want to mention that the affirmation signals are given in parallel, however in a prudent time interval.
By transferring this beginning to our own days, we have the ability to adapt it to asset charts and index charts, to various industry indices, and so on. In this way, since, we will have a strong signal if the market indices ensure and do not offer contradictory signals.
Fifth start: Volume should lock in trend
Volume is categorized as one of the most important components to confirm signals. It is still a secondary element, contingent on what cost suggests to us as a primary element. Not Yet its importance is evident.
Dow had it very clear, volume is a powerful component of affirmation. In an uptrend, the volume should increase with each boost. This suggests that there is intention, it could be of purchase or of commercialization, however there is intention; there is public collaboration in the impulses. Consequently, the impulses are consistent with the intentions of the crowd.
If the volume is increased on the pulses, it should decrease on the corrections. This affirms the intentions of the market. The volume suggests activity, if the activity increases with the impulses it suggests that there is a good predisposition in that movement. Taking this in the opposite sense, a correction with a decrease in volume denotes that there is no predisposition, it is only an attitude as a natural result of promotion.
The analysis of the volume goes much further, it is a rather long matter thanks to its great importance. In accumulations and distributions it plays a fundamental role. We could assign many pages to volume analysis.
Sixth start: A trend is presumed to be in effect until it gives definite signals that it has reversed.
Just as a person is innocent until the opposite is shown, the tendencies remain active until it is proven that they have been broken. This also wants to tell us that we do not have the possibility to anticipate events until we have the assertion.
How do you break the trend?
If a trend is defined as a series of higher and lower (uptrend) or lower (downtrend) highs and lows, it is to be assumed that once you stop doing that sequence, the trend will be over.
The maxim of this beginning tells us that the trend is in force as the market behaves in this way. Most likely, the trend will continue, until its dissolution is confirmed. So we will only be able to discuss a market turn once the succession of highs and lows is altered. As both, for all intents and purposes the trend continues to operate.
Despite the fact that there are technical tools that have the possibility of warning us of a change in trend, including trend guidelines, tolerances and resistances. The primary assertion is the dissolution of the succession of maximums and minimums. One of the criticisms of this beginning of the Dow Theory is that once it is confirmed we will have lost between 20% to 25% of the potential route. This is why tools are used to anticipate this "true" assertion.
Until the trend is broken we must assume that we are a correction. Violation of the trend guideline, support, or resistance has a chance of being a good primary signal; not however should be the next stage to confirm that the trend is broken:
In an uptrend the market makes a higher higher and then breaks the previous low. This is known as a "good swing".
In a downtrend, a “good oscillation” is given by the fact that it has exceeded the lowest minimum and in the retracement ( bullish ) it breaks the previous major, producing a major major .
In an uptrend, once the market is unable to overcome the previous high and subsequently falls above the low. This displacement is known as "bad oscillation".
A "bad oscillation" in a bear market is given once the market is not able to fall below the previous low and then go up to mark new highs.
Let's look at this sentence formulated by Dow in one of his articles carefully:
“The trading records show that, in several cases, once a cost reaches the highest ( bullish momentum), it subsequently has a moderate downturn (retracement), and then rises again until it approaches the highest figures. If, after such a displacement, the price falls again, it will possibly drop a certain distance ”.
This sentence explains the double-top graphic boss, it occurs once the highest fails to overcome the previous highest (it rises again until it approaches higher figures), when it retreats it is possible that it generates a change in trend. For therefore the first indication of the separation of an uptrend the inability of higher higher than the previous is generated. The succession of ascending highs is broken. This would represent a "bad swing".
Conclusions
These are the principles that form the Dow Theory. Not only do they have to be learned, they have to be internalized and continually kept in mind when examining a graph. On them rest each of the instruments that offer meaning to the technical study.
In fact, an operator could perfectly examine a market and maintain an investment operation using only those principles. However, indicators were emerging that help us to do this task. They put us on alert and have the possibility of serving us as support.
Who was Dow?
Charles Henry Dow was an economist born in 1851 ( Sterling , Connecticut). In addition, he has been a journalist, covering economic news in different newspapers.
At the Kierman news agency he met a fellow profession who would later become his partner, Edward David Jones. The two founded a financial consulting agency together with Charles Milford Bergstresser . The agency was called Dow Jones & Company.
Dow has also been a founder of the well-known financial newspaper The Wall Street Journal , along with his partner Edward Jones. Soon after, it formed the Dow Jones Industrial Average (DJIA 30) stock index , as well as an index for transportation organizations. It should be remembered that at that stage the primary transport was the train.
As if all that were not enough, Dow has been the founder of the foundations of the technical study as we know it today. What we call "technical analysis" has its beginnings in the principles today we are going to try, which were the work of Dow and linked together make up his theory. This theory has been an initiative for the first time in the early twentieth century.
The Dow Theory is still considered the cornerstone in technical study analysis. This is the reason why a technical analyst should know it and keep it continually in mind.
The stock indices that Dow brought to light were considered barometers of market activity and became an instrument of fundamental importance for analysts, even though this has already been years after his death.
Dow, unfortunately, never abandoned a written work. Only what remains of him were a sequence of articles published in The Wall Street Journal . Dow's theory was published in 1903 (by SA Nelson), one year after his death. It has been a compilation of his essays in a book entitled "The ABC of speculation with values." It was there once that for the first time the "Dow Theory" was used as an expression to conceptualize his beginnings of study.
The Basic Principles of Dow Theory
Next, we are going to look in detail at the 6 principles that unite the Dow Theory. You must read them carefully because this is the fundamental reasoning that will help you to invest successfully.
First start: Stockings discount everything
Financial markets reflect in their cost all the components that are generally affecting supply and demand . This is the primary reason why technical analysts rely on chart analysis. All events, their reasons and their aftermath are reflected in the cost. Charts are the main working tool of a technical analyst.
The cost is important in everything that happens, even before it happens. The market is a huge mass of informed people who act out of expectations. Before the production occurs, the market can discount it in its cost.
Just by diagnosing the trend of the prices in a financial asset we will be able to deduce what has happened, what is happening and what can (probably) happen in the future.
Once Dow talks about measures it has to do with stock indices. Recall that the Dow Jones Industrial Average (DJIA 30), as well as the train index that he himself designed are nothing more than a simple arithmetic mean of the prices of the most representative securities listed on the stock market (it is not a weighted index) .
Let's review what has been observed, if the cost of an asset reflects each of its reasons, that is, all the fundamentals that support supply and demand . In addition, an index is an average of the primary assets that are listed on a market. Only by solving the trend of the stock index will we have the possibility of having an initiative in the case of the general market and in a certain way of the economy (financial markets are a leading indicator of the economy).
For thus the term "middle discounted everything" is neither more nor less than a way to mention that the prices of stock index Dow Jones remained warning of what occurred, which happens and, for those who know how to interpret the graphs, which can possibly happen.
This beginning can also be applied to the graphs of the assets taken individually, the cost of the asset discounts the components that are affecting it. Everything is drawn on a graph. In other words, technical exploration. No more no less.
Second start: The market has 3 trends
In an uptrend: Ascending highs and also ascending lows. Each higher surpasses the previous one, the minimums are higher and higher.
In a downtrend: descending highs and also descending lows. Each low is lower than the previous one, the highs are getting lower and lower.
In a lateral trend: equivalent highs and lows. They do not ascend or descend. The market moves in a range.
Dow defined an upward trend as:
"A situation in which each successive recovery closes higher than the high degree of the previous recovery (ascending maximum), and each successive low degree of recovery also closes more than the low degree of the previous recovery (ascending minimum)."
As we can see, Dow has already taken care of conceptualizing trends. Of course, in a trend there are impulses and setbacks, they are the laws of action and attitude. Dow was clear that these universal laws of action and attitude applied to financial markets just as they apply to the rest of the world (physical laws).
Promotion (action): Intense displacement that provides the direction of trend.
Recoil (reaction): Shorter and less violent movement. It is a "free time" of the promotion .
The two movements make up a trend. The impulses have to be bigger to the corrections. This will make the market make higher and lower highs and lows (or lower, if we are facing a downtrend).
"Bull trends are sequences of ever higher highs and lows.
On the other hand, the downward trends make up increasingly lower highs and lows "
Once we have observed that Dow has been the individual who established the trend term and how he defined it, we are going to consider how he compared the trends with the movements of the ocean. Just like there are tides, waves, and ocean waves, there are 3 trends in a market:
The primary trend
The secondary trend
The minor (or tertiary) trend
The tides rise and fall, this causes the waves to enter the beach more and more if the tide is rising (or less, if the tide is going out). We have the possibility to equate the primary trend with the tides. The structural trend of the market.
The primary trend has a preeminent duration to the year, they are the monumental background trends. Sometimes they last more than a year (they can last several years). However , we will know how to identify it by its duration. As we will explain, there is no written rule about the duration of a trend. If a trend is rigid for a little less than a year, you will have to use common sense and be flexible with this rule.
On the other hand, the secondary (or intermediate) trend is itself the corrections that are generated in the primary trend and that are part of it (reversals of the primary trend). He described it best:
We have a primary trend, suppose it is bullish . According to the universal laws of action and attitude (which are also used in financial markets as well as in all universal resources), this primary tendency will have moments of encouragement and moments of correction.
These trends that make up the impulses and corrections of the primary trend are called “secondary trend”. Rather, we are talking about corrections, since being the primary upward trend, its impulses are confused with those generated in that one.
If the trend were downward, it would work the same, the corrections (in this upward situation) could be those that give shape to the secondary trend. The downward impulses of the secondary trend would be confused with those of the primary trend, since both trends go in the same direction and one is incorporated into the other.
In this way, since the secondary trend is really the impulses and corrections that make up the primary trend. However, it is only spoken of in the corrections (in the opposite sense of it).
Secondary trends usually last from 3 weeks to 3 months and go back between 1/3 and 2/3 of the previous promotion. Even though, more frequently, the setback is 50% of the previous promotion. We review everything as it is a fundamental criterion.
Corrections of the primary trend (secondary trend):
They usually last from 3 weeks to 3 months.
They can arrange between 1/3 and 2/3 of the previous promotion.
More often than not, the correction is 50% of the promotion.
In the end, we have to see the minor trend, which is the shortest. They are fluctuations of the secondary or intermediate trend (if they are corrections of the intermediate trend, they move in the same direction as the primary trend).
They tend to last less than 3 weeks, even though there is no rule that dictates how rigid a trend (whatever level it is). The time limits that are indicated (better commented than indicated by the Dow itself) are only indicative scales. There is a certain margin, moderate and prudent, in which the analyst will have to use common sense.
At the end of the day, the market moves according to 3 trends, one in the other. If we are able to understand this well (but well enough) and to detect them effectively, we will have a lot to win when it comes to examining financial markets and investing money in them.
Third beginning: The primordial tendencies possess between stages
Once we have seen the 3 trends that have the possibility of occurring in the market, we must find out the stages of all of them, even though Dow considered these stages for the primary trends, since in these trends these stages are really well differentiated.
There is no doubt that the stages that we are going to examine are granted in all grades, they work better the higher the level of the trend.
The 3 stages of the market, or of the trend (mainly the primary ones) is a criterion of great importance to understand the performance of cost movements (without neglecting the other principles and in a mixture with them).
First stage: Accumulation
This stage represents the purchase made by expert investors, they are the ones who possess the accumulation power (capital and means) and most of the time they work in a syndicated way to triumph accumulation force.
Assuming that the above trend is downward, the market will reach a cost level at which the most seasoned investors think they are fit to start their purchases.
The buying campaign begins, the market has already discounted each of the unfavorable news that caused the price to fall. Purchases are made discreetly. If all the expert investors (and their huge accounts) suddenly entered the market, the stock would turn sharply (in situations the market turns sharply, however in primary trends it is more possible that an accumulation stage will be generated before).
This stage is characterized as the market goes from an evidently downward trend to a lateral stage or draws a head of turn that technical analysts know. The smart money (the professionals) is buying secretly, they keep withdrawing occupations from the market and once the demand increases there cannot be enough supply to satisfy it. They take advantage of the fact that fear is still rife and they buy once the whole planet sells. As the cost does not skyrocket, rather it stabilizes.
In short, the first stage of accumulation is characterized by a purchase in monumental chunks once the market is at the correct cost grade. The cost does not rise because there is a fund supply and the campaign is really well planned. Expert traders are actively involved in this stage.
Second stage: Public collaboration
Once the professional traders have accumulated all the existing paper, the market is ready to go up. The bad news that marked the downside, and that was probably still on the minds of investors during the accumulation phase, is beginning to dissipate.
The environment becomes conducive to shopping. The change in conditions in the economic paradigm was previously known to professionals, for that reason they accumulated while the rest of the mass (a financial market can be defined as a psychological mass) sold their shares (or whatever asset it was).
At this point, remember, a large part of the assets are outside the market, in the hands of professional operators. They have withdrawn supply and demand begins to increase. The public wants to participate in the market (en masse), the news. There is no such offer in the market for the amount of demand begins to surgi r !
Professional traders have restricted the existing floating supply. The effect is very clear, and premeditated; prices start to rise. This is where the true trend forms, the first impulse arises.
Obviously, this impulse will contain its corresponding correction which, as we will recall, can be between one third and two thirds of said impulse (although it will most likely correct half). But, as we have also seen, these corrections do not alter the primary trend (the highs and lows are still higher). The corrections form the secondary trend, which will also have its minor corrections (minor trend).
This is how the public participation phase is formed, through impulses and setbacks.
Third stage: Distribution
As costs go up and up, as a result of mass public collaboration (previous phase) and the economic news is getting higher and higher, the economic environment becomes overly optimistic (some define this sentiment as greed, rather than optimism; they are not wrong). The whole planet begins to talk about the market, the level of speculation increases, the public media echo that everything is better than ever.
The population wants more and more, the cost seems overwhelming. Credit and excessive leverage are even used to avoid this possibility of making money.
It is at this moment, when there is a massive demand, it is once the experts decide that the moment to sell has arrived. They have to take advantage of the situation and destroy their portfolios, or then it will be too late. They have the possibility of obtaining high cost counterpart without their huge sales causing the market to crash. It is a time in which there is demand to cover the large proportion of supply that is going to be launched.
Therefore, the distribution stage begins. Release the paper that they still have accumulated at the hands of the masses. Now or never.
As in the first accumulation stage, this stage should be entirely discrete, they know that once they dispose of the asset the cost will begin to discharge due to oversupply in the market. They have good analysts, contacts with the public media and each of the elementary instruments to manipulate (in the legal sense) the cost of the asset.
We are not talking about a manipulation of assets, they manipulate the masses. To the public. They play on their fear and their greed. Your buying and marketing campaigns remain designed with the accuracy of a Swiss watch. The market has reached acceptable cost levels and it is profitable to market your portfolio assets. In addition, there is a trade-off. The market makes a turn boss, it could be a side range or a famous turn figure.
When they have shared the asset, the same thing happens as in the second stage, but in the opposite direction. there is a large proportion of paper in the market (supply) and it often happens in the company of a lack of demand since we are finally in the period and the media, which until recently published good news, abjures what has been published. The economic paradigm changed, the experts knew that this was going to happen before the case was made public.
The effect is a clearly marked downtrend. Also, with built-in panic. It is the same stage of public collaboration only in the opposite direction.
After the crash, the game begins again. In this way the financial markets work from their reality.
Fourth start: The means have to confirm each other
Once we talk about averages, in this environment, we are referring to stock indices. The indices were created by Dow by calculating an arithmetic mean of the price of the most representative securities in a financial market.
In the era in which Dow gave birth to his theory, there were only 2 indices (established by himself). Dow was referring to the Industrial Average (the popular Dow Jones Industrial Average ) and the Train Average (an index that is now extinct).
There are currently a larger number of stock indices, even in the same market. However, the spirit of this beginning remains: The affirmation of signals by means of correlated markets.
Dow really wanted to mention with this that the averages should offer the same signal. The indices therefore have to confirm each other. He does not want to mention that the affirmation signals are given in parallel, however in a prudent time interval.
By transferring this beginning to our own days, we have the ability to adapt it to asset charts and index charts, to various industry indices, and so on. In this way, since, we will have a strong signal if the market indices ensure and do not offer contradictory signals.
Fifth start: Volume should lock in trend
Volume is categorized as one of the most important components to confirm signals. It is still a secondary element, contingent on what cost suggests to us as a primary element. Not Yet its importance is evident.
Dow had it very clear, volume is a powerful component of affirmation. In an uptrend, the volume should increase with each boost. This suggests that there is intention, it could be of purchase or of commercialization, however there is intention; there is public collaboration in the impulses. Consequently, the impulses are consistent with the intentions of the crowd.
If the volume is increased on the pulses, it should decrease on the corrections. This affirms the intentions of the market. The volume suggests activity, if the activity increases with the impulses it suggests that there is a good predisposition in that movement. Taking this in the opposite sense, a correction with a decrease in volume denotes that there is no predisposition, it is only an attitude as a natural result of promotion.
The analysis of the volume goes much further, it is a rather long matter thanks to its great importance. In accumulations and distributions it plays a fundamental role. We could assign many pages to volume analysis.
Sixth start: A trend is presumed to be in effect until it gives definite signals that it has reversed.
Just as a person is innocent until the opposite is shown, the tendencies remain active until it is proven that they have been broken. This also wants to tell us that we do not have the possibility to anticipate events until we have the assertion.
How do you break the trend?
If a trend is defined as a series of higher and lower (uptrend) or lower (downtrend) highs and lows, it is to be assumed that once you stop doing that sequence, the trend will be over.
The maxim of this beginning tells us that the trend is in force as the market behaves in this way. Most likely, the trend will continue, until its dissolution is confirmed. So we will only be able to discuss a market turn once the succession of highs and lows is altered. As both, for all intents and purposes the trend continues to operate.
Despite the fact that there are technical tools that have the possibility of warning us of a change in trend, including trend guidelines, tolerances and resistances. The primary assertion is the dissolution of the succession of maximums and minimums. One of the criticisms of this beginning of the Dow Theory is that once it is confirmed we will have lost between 20% to 25% of the potential route. This is why tools are used to anticipate this "true" assertion.
Until the trend is broken we must assume that we are a correction. Violation of the trend guideline, support, or resistance has a chance of being a good primary signal; not however should be the next stage to confirm that the trend is broken:
In an uptrend the market makes a higher higher and then breaks the previous low. This is known as a "good swing".
In a downtrend, a “good oscillation” is given by the fact that it has exceeded the lowest minimum and in the retracement ( bullish ) it breaks the previous major, producing a major major .
In an uptrend, once the market is unable to overcome the previous high and subsequently falls above the low. This displacement is known as "bad oscillation".
A "bad oscillation" in a bear market is given once the market is not able to fall below the previous low and then go up to mark new highs.
Let's look at this sentence formulated by Dow in one of his articles carefully:
“The trading records show that, in several cases, once a cost reaches the highest ( bullish momentum), it subsequently has a moderate downturn (retracement), and then rises again until it approaches the highest figures. If, after such a displacement, the price falls again, it will possibly drop a certain distance ”.
This sentence explains the double-top graphic boss, it occurs once the highest fails to overcome the previous highest (it rises again until it approaches higher figures), when it retreats it is possible that it generates a change in trend. For therefore the first indication of the separation of an uptrend the inability of higher higher than the previous is generated. The succession of ascending highs is broken. This would represent a "bad swing".
Conclusions
These are the principles that form the Dow Theory. Not only do they have to be learned, they have to be internalized and continually kept in mind when examining a graph. On them rest each of the instruments that offer meaning to the technical study.
In fact, an operator could perfectly examine a market and maintain an investment operation using only those principles. However, indicators were emerging that help us to do this task. They put us on alert and have the possibility of serving us as support.
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