Dow Theory and the Forex Market
Dow took a further analysis of the relationship between the trend of the market volume and the trend level of quotation indexes. The Dow theory states that during the bull maket the growth of rates is accompanied by increasing the trading volume and price reductions decreases the volume. In the interim of technical correction, despite the depreciation of prices, a simultaneous decrease in volume is a clear predictor of the overall rising trend, which will soon have the chance to go from the “shadow zone” to light.
Analogicly – in the bear market – there is an inverse relationship. During the main recede trend, we have to deal with the increase, which is accompanied by decreases in quotes. By contrast, sales volume decreases when listing the technical correction grow to the top. According to Dow it is a symptom of a general bear market, because the observed increase in the priceusually turns out to be very volatile.
Dow Theory was mainly first used to identify the trends of the market crisis on the American Stock Exchange NYSE. Dow used the stock exchange indexes (DJIA and the DJTA).
Dow Theory has no practical applications for determining the point of buying or selling currency pairs on the Forex market. However, this theory makes sense, because the knowledge of the main assumptions of this theory enables us to understand the other well-known theories and systems to determine the turning points in courses such as Elliott wave theory, or simply then it will be easier to learn the trend analysis, analysis of the formation and help to determine entry and exit points to the forex market.
