1️⃣ The Basic Concepts of Dow Theory
🔸Three Major Axioms of Dow Theory:
Axiom 1: Market behavior encompasses everything;
Axiom 2: Market behavior operates by trends;
Axiom 3: History tends to repeat itself.
🔸Three Assumptions of Dow Theory:
Assumption 1: The main trend is not subject to human manipulation;
Assumption 2: Market indices reflect all information;
Assumption 3: Dow Theory requires objective judgment.
🔸Three Types of Trends in Dow Theory:
Trend 1: Major trend, which can last for several years;
Trend 2: Corrective trend, lasting several weeks or months;
Trend 3: Short-term fluctuations, lasting from several days to several weeks.
🔸The three phases of the main trend in Dow Theory:
Phase 1: Greed or fear sentiment;
Phase 2: Reflecting the actual fundamental situation;
Phase 3: Fear or greed sentiment.
2️⃣ Practical Experience of Dow Theory:
🔸Judgment of Bull Markets and Bear Markets
Dow Theory states that as long as the peak of the average index exceeds the previous peak, it is in a bull market; when the lowest point is below the previous lowest point, it is in a bear market; however, it is usually difficult to judge whether the main trend has ended because once the main trend reverses, price changes will follow, but this may also just be an adjustment.
🔸Judgment on Transition from Bear Market to Bull Market
Dow Theory suggests that if the secondary upward movement in a bear market slightly declines after reaching a normal peak without reaching the previous lowest point, and then rebounds to exceed the previous rebound's highest point, we can firmly conclude that a fundamental bull market has formed, the length of which cannot be determined.
🔸Discussion on the 'Herd Effect' of Currencies
Dow Theory suggests that if the rise of mainstream currencies does not trigger the rise of other currencies, it indicates that the public is unwilling to buy into the mainstream currency. Once this situation is clarified, when the price of mainstream currencies pauses, it will drive up the prices of altcoins.
🔸Discussion on 'Double Tops'
Dow Theory suggests that in most cases, when the price of a currency reaches a peak, it will moderately decline and then return to near the highest price; if the price then declines again, the magnitude of the decline is likely to increase.
🔸Thoughts on 'Mirrored Symmetry'
Dow Theory holds that the number of days the market rises and falls over a relatively long period is approximately the same. If there is a continuous rising period, there will almost inevitably be a falling period to maintain balance.
🔸Thoughts on 'Divergence'
Dow Theory states that it is impossible to pre-determine the magnitude of any currency index trend, but the further it goes, the greater the reaction will be, thus increasing the certainty of successful trading based on this reaction.
🔸Insights on 'Market Manipulation'
Dow Theory suggests that the number of successful, carefully planned manipulation actions is very few and only occurs during fundamental bull markets; this is because the market itself sees further than the manipulators. Experience in any trading market shows that manipulation is almost non-existent in declining bear markets. In fundamental bull or bear markets, the forces driving the market are beyond the control of manipulation; however, in other movements of Dow Theory, such as secondary rebounds in bear markets and secondary declines in bull markets, or the ever-present daily fluctuations, manipulation can exist. However, even in such cases, it can only target individual or a few currencies.
🔸Understanding of Rules and Human Nature
Dow Theory holds that market fluctuations are never random; they are inevitably controlled by some laws, but these laws are so vast that we can only touch their trajectory once or twice in our lifetime.
3️⃣ The Five Theorems of Dow Theory:
Theorem One: The Main Trend
The main trend represents the overall fundamental trend, usually referred to as a bull or bear market, with a duration that can be less than a year or last several years. Correctly judging the direction of the main trend is the most important factor for the success of speculative activities. There is no known method to predict the duration of the main trend.
Theorem Two: The Major Bear Market
The major bear market is a long-term downward trend, interspersed with significant rebounds. It arises from various adverse economic factors, and this trend will only end when the currency price fully reflects the worst possible scenario.
Theorem Three: The Major Bull Market
The major bull market is a comprehensive upward trend, interspersed with secondary retracement trends, with an average duration longer than two years. During this period, due to economic improvement and increased speculative activity, both investment and speculative demand rise, thereby pushing up the prices of currencies.
The bull market has three phases:
Phase one, people regain confidence in future economic recovery;
Phase two, currencies respond to known improvements in corporate earnings;
Phase three, speculative fervor intensifies and currency prices inflate significantly — the price increase in this phase is based on expectations and hopes.
Theorem Four: Secondary Retracement Trends
Secondary retracement trends are significant downward trends in a bull market or significant upward trends in a bear market, typically lasting from three weeks to several months; during this period, the retracement amplitude is 33% to 66% of the amplitude of the main trend after the last secondary retracement trend ended. Secondary retracement trends are often mistaken for changes in the main trend because the initial movements of a bull market may merely be secondary retracement trends of a bear market, and the opposite can happen after a bull market peaks. Secondary retracement trends are significant medium-term trends that run counter to the main trend. Determining which is the 'important' medium-term trend counter to the main trend is the most subtle and difficult part of Dow Theory; for speculators with high credit expansion, any misjudgment can lead to serious financial consequences.
Theorem Five: Important Principle of Dow Theory — Index Confirmation
Index confirmation is one of the most important principles in Dow Theory; without mutual confirmation from two indices, any price movement will be of no research value. The trend can only be confirmed when significant indices show the same or similar fluctuations. The behavior of a single index cannot serve as an effective signal for trend reversal.
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