One of the most unnoticed issues of technical analysis in Forex market is the ability to understand the principal philosophies of the Dow Theory. Dow Theory remains the main collection of editorials created by Charles Dow in early 1900’s and is still considered the foundation of technical analysis.
The Dow Theory is mostly used by stock market traders, but this can help beginner traders to understand the essence of market and help them to identify market trends, accordingly giving them an opportunity to enter into more profitable trades.
One of the most well-known theories of Dow is his belief that there are three principle types of trends:
1. The Primary trend
2. The Secondary trend
3. The Minor Trend
The primary trend of Dow Theory is a long term trend that is mostly used by beginner Forex traders. This trend can last for years. Actually, before starting the trades, all Forex traders should figure out the main direction of the currency pair moving. The secondary trend is the movement in the opposed way of the primary trend, which may last from several weeks to several months. At last, the minor trend of Dow Theory is quite the same as it sounds to be. This trend is principally the one what beginners want to use.
How do you define a trend?
If you are using Dow Theory, the trend that is rising 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 falling is nothing more than a series of sell-offs in which the previous sell-off is higher than the current one.
If you want to deal with Forex investment, you should be able to understand that a trend is long-term, and until it is proven that the trend is moving in the other direction, there is no need for you to follow the trend.
You should also realize that the secondary trends can help you to make a good profit. If you see that the primary trend is rising, you can already assume that the secondary trend could be a series of rallies and sell-offs.