This article continues to introduce the three common schools of technical analysis. Some experts who have studied technical analysis deeply have made their own summary and integration after seeing various patterns, indicators, and trends. They believe that the market will operate according to the established cycle laws of the past. As long as they follow this trend, they will be able to You can make money in the swings, and there are several schools proposed by more famous people. These schools can be said to be the culmination of K-line charts, technical indicators, and patterns. They are Dow Theory, Elliott Wave Theory and Granville's Eight Principles respectively.
Dow Theory
Dow Theory is one of the basic theories of technical analysis proposed by Charles Dow and Edward Jones at the end of the 19th century. This theory laid the foundation for modern technical analysis and has a profound impact on trend analysis of the stock market and other financial markets. The core ideas of Dow Theory include the following points:
The market is trending: the market is in a constantly changing trend, including upward trends, downward trends and consolidation trends.
Three trends in the market: Dow distinguishes market trends as main trends, intermediate trends and short-term trends. The main trend is a long-term trend, which may last for several years; the intermediate trend is such as a pullback in a bull market or a rebound in a bear market, which may last from weeks to months; and the short-term trend is a short-term fluctuation, usually a daily fluctuation. The time may be a few hours or a day, a few days to a few weeks.
Three stages of major trends: Dow Theory describes the main trend as having three stages, namely the accumulation stage (accumulating stocks), the rising stage (most investors participate), and the distribution stage (selling stocks).
Confirmation of trading volume: Dow Theory believes that trading volume is crucial to confirm the strength of the trend, and the confirmation of the trend needs to be matched with the corresponding changes in trading volume.
Indexes confirm each other: The Dow Theory proposes that when the Dow Jones Industrial Index and the Dow Jones Transportation Index (which includes stocks in the aviation, shipping, railway and other transportation industries, and is regarded as a leading indicator of economic activity.) hit new highs or new lows at the same time At this point, you can confirm the strength of the trend. Because these two indicators hit highs or lows at the same time, it means not just a specific industry or sector, but the entire economy is developing in the same direction.
Overall, the purpose of the Dow Theory is to provide investors with a clearer understanding of the direction in which the market may be developing by observing changes in market trends and trading volumes.
Elliott wave theory
Elliott Wave Theory is a technical analysis theory for analyzing financial markets proposed by American financier Ralph Nelson Elliott in the early 20th century. This theory is based on market price fluctuations and specific wave structures. It believes that market prices do not change randomly, but follow certain wave patterns. The main ideas of Elliott Wave Theory include:
Wave structure: Elliott Wave Theory believes that changes in market prices present a specific wave structure, which is divided into five waves and three waves. The five-wave structure represents the development of the trend, while the three-wave structure represents the correction of the trend.
Five-Wave Trend: The five-wave structure in Elliott Wave Theory consists of three rising waves (waves 1, 3, and 5) and two falling waves (waves 2 and 4). This structure forms a complete trend.
Three-wave correction: After the five-wave trend, the market price will undergo three waves of correction, forming an A-B-C structure. Wave A is a reverse correction wave, wave B is a partial correction wave, and wave C is a trend reversal wave.
Golden Section: Elliott Wave Theory uses the golden section ratio, namely 1:1, 1:1.618, 1:2.618, etc., to measure the length and time of waves.
Classification of waves: Elliott wave theory divides waves into major waves and minor waves, while emphasizing the proportion and symmetry of waves.
The core idea of Elliott Wave Theory is that market price fluctuations are not random, but have a regular wave structure. Although this theory has been influential in the field of technical analysis, it has received some criticism for its complexity and subjectivity. Using Elliott Wave Theory to conduct market analysis requires considerable skills and experience in identifying and understanding wave structures.
Granville’s 8 Rules
W.D. Gann's 8 Laws are the basic concepts he proposed in stock and commodity trading. These laws incorporate his observations of market movements and his trading philosophy.
Law of Vibration: Gann believes that the market follows a specific vibration law and that there is a fixed relationship between price and time. This vibration can be predicted and exploited.
Law of Cycles: The market has fixed cycles that can be used to predict future price changes. Cycles include days, months, quarters, and years.
Law of Geometry: Gann believes that geometry and proportions are of great significance in the market, and he uses various geometric shapes and proportions to predict support and resistance levels.
Law of Angles: Price movement has specific angles, and Gann uses different angles to predict the direction of price movement.
Law of Time: Gann emphasized the importance of time in market analysis and used various time periods to predict future price movements.
Law of Trend: The market has a clear trend, and Gann advocates a trading strategy that follows the trend.
Law of Patterns: Market prices and trading volumes form specific graphics and patterns, which can provide trading signals.
Law of Risk Management: Gann emphasizes the importance of risk management and recommends traders set appropriate stop loss levels to protect investment capital.
These laws are the basic principles proposed by Gann in his trading theory, considered by some traders to be one of the classics of technical analysis. However, these laws have also been criticized as being too subjective and difficult to apply concretely. In practical applications, investors should integrate multi-faceted analysis methods to formulate a more comprehensive investment strategy.
summary
In the 7 articles so far in this issue, we have finally introduced the common indicators, patterns, and schools of technical analysis. I believe that friends who have followed this all the way have already mastered the knowledge of technical analysis. For basic cognition, if you haven’t read the previous issues or have forgotten them, you can click on Brother Nao’s homepage to review them~ The next article will be the highlight of this special series, that is, do we think technical analysis is useful? We will discuss it from two aspects: individual aspect and macro aspect. If you are interested, don’t forget to follow Nao Ge’s account to get notifications of the latest articles!