Market 3 Trend On The Dow Theory: Is It Still Relevant To Use Now?
Dow Theory is the basis of many traders who perform technical analysis. The Dow Theory was introduced by Charles H. Dow in 1900 to 1902. Charles Dow firmly believes that the stock market as a whole is a reliable benchmark for knowing business conditions in the economy. Thus when the trader performs an accurate and good analysis, it will be able to identify the market direction.
In this discussion we will focus on discussing the 3 trends market in Dow Theory. Explanations will be conveyed and linked to their relevance in the present.
Let us consider the explanation of Dow Theory below.
Trend Primer which is a major trend that often occurs in the market, so the primary trend is very important in the market. The primary trend will greatly affect price movements and can easily influence secondary or minor trends.
Charler Dow says that the Primary Trend has a tendency to last between 1 and 3 years.
Another thing you need to understand is the Primary Trend has an effect until there is confirmation of reversal.
For example like this, if there is an uptrend where the price closes below the lowest price, then this could be a signal that the market will move downwards and will not move towards higher again.
In the above explanation we can understand that the Primary Trend is the main direction in the current price movement. On the other hand there is a Secondary Trend that will move in the opposite direction with the Primary Trend or we can identify as a correction of the Primary Trend.
A simple example like this, when the Primary Trend is rising thus the Secondary Trend is a correction movement that occurs the Primary Trend.
The thing you need to remember is because the Secondary Trend is a correction movement of the Primary Trend, then there will be no reversal going on here.
Another character that you need to understand here is the Secondary Trend has price movements that tend to fluctuate compared with the Primary Trend.
The last tip is the Minor Trend which usually lasts for less than 3 weeks. Well, Minor Trend is a correction movement of the Secondary Trend.
Things to note here is in the Dow Theory is often a major concern is the Trend Primer and Secondary Trend, here the other Trend Minor is only used as a complement only.
This can happen because when the trader is too focused on Trend Minor, then this will trigger the disruption of the focus of traders into short-term movements. This means they will lose focus in the long run
Know The Phases That Are In The Primary Trend
When Bullish Market Or Up
The beginning of a bullish market is when the accumulation phase occurs and is the beginning of the upward movement of the trend. When this happens, traders or investors who understand will start taking positions in the market.
Phases like this will usually start to appear after the end of a downward trend and when market conditions look very bad.
The interesting thing about the accumulation phase is that it is very difficult to identify because it appears at the end of a downward trend. This could be just a rebound or Secondary Trend movement and not included from the beginning of the new trend movement.
2.Fase of Public Participation
As investors begin to gain information that occurs in the accumulation phase, they begin to believe that a recovery session will occur in the future. In this case the public participation phase begins to enter.
As this phase occurs, negative sentiment begins to slowly diminish, which is accompanied by improving business conditions. Thus will more and more market participants who began to re-enter the market to enliven existing.
With the increasing price increases due to improved business conditions, it means that the number of market participants who enter began more and more.Thus the current phase of the exceeding phase begins.
The Exceeding phase is the last phase when there is an increasing trend and in these conditions, smart market players start to leave the market and get out. In this condition also the last buyers begin to enter into the market and when the market price increases. What they do not realize is that they buy when the price is at its highest point.
Declining Market Condition Or Bearish
1. Fase Distribution
As the market begins to show symptoms of decline, the distribution phase begins with market participants who have gained huge amounts of profits from selling their positions. When this phase occurs, there will be an opposite phase of accumulation as the market is rising. Sentiment will continue to be optimistic and hope the market will continue to improve.
When this phase occurs, it is the same as the accumulation phase described earlier. You will be very difficult to identify in the early stages.
2. Fase of Public Participation
Then start entering into the public participation phase as we have mentioned above. The difference here is that actors in the market begin to remove the positions and market conditions will get worse and become negative. The market will continue to decline and this continues to occur along with the selling done by market participants.
3. Fase Panic: Dow Theory
The last phase begins to enter the panic phase, where a large number of selling takes place in a very short time. When this phase occurs, the market will be overwhelmed by negative sentiment in which economic data starts to weaken and business starts to deteriorate.
There are many investors who are starting to let go of the positions they have and they usually come in during the exceeding phase.
Thus the 3 phases that occur in the market based on Dow Theory disclosed by Charles H. Dow. Hope to add to your knowledge with regard to Dow Theory and can be the foundation when you make business decisions.