Forex Trading and the Dow Theory

By: Leo Dimilo
One of the most overlooked aspects of technical analysis in is the ability to understand the primary philosophies of the Dow Theory. For those of you who don't know what the Dow Theory is, it is primarily a collection of editorials created by Charles Dow in the early 1900's that is still considered the cornerstone of technical analysis.

The dow theory is primarily used by stock market traders but its principles can help a beginning forex trader understand how the market moves and help them identify a trending market thus giving them the chance to enter into more profitable trades.

So what can you learn from the Dow Theory that can be immediately applied to forex.

One of the most prominent theories of Dow is his belief that there are three individual types of trends.

1. The Primary trend

2. The Secondary trend

3. The Minor Trend

The Primary trend is the long term trend and is one of the most underutilized trends that beginner forex traders use. Why? Because most of these traders are concerned with the here and now and therefore trade using 5,10, or 15 minute time frames.

However, one of the most frustrating things a trader can deal with is identifying a trend only to watch it whip saw back to its original place. The Primary Trend actually is the overall trend and can last for years. All forex traders should know what the general direction of the currency pair is moving before jumping in on trades, even they are intra-day.

The Secondary trend can last anywhere between a few weeks to a few months and this trend is normally seen as a series of rallies and sell-offs.

Finally, the minor trend is exactly what it sounds and is primarily what beginner forex traders seem to want to use. These trends can counter the primary trend but will most likely correct itself. Many newbie traders use these trends to pick a few pips here and there in intra day trading.

So, how do you define a trend?

Well, if you are using Dow Theory, a trend that is going upwards is nothing more than a series of rallies in which the previous rally is lower than the current one. On the other side, a trend that is going downwards is nothing more than a series of sell-offs in which the previous sell-off is higher than the current one.

I should note that Dow didn't focus on intraday trading. His rally points would be at the end of the day, of the week, and so on...not from hour to hour.

So, what can you take from this if you are focusing on the forex market?

You should be able to understand that a trend is long term and until it is proven that the trend is going in the other direction, you should follow the trend.

You should also understand that the secondary trends can be places to make a lot of money. If you know that the primary trend is moving upwards, it would be safe to assume that the secondary trend might be a series of rallies and sell-offs, but in the end the primary trend rules.

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