Dow Theory

1 kwi 2018

Here is a prime on Dow Theory to help you get on the right track.

Charles Dow was an American journalist. He founded the Dow Jones & Co., created the Dow Jones Industrial Average (DJIA), founded the Wall Street Journal and created the Dow Theory, the basis for technical analysis (which is the important part for us). All in the XIX century.

I will use the Dow Theory, and just that, to analyze the BTCUSD daily chart from the beginning of 2017 to today. You will learn, I hope, the basics and see how to implement a very simple, but effective, trend following strategy using just that.

Dow divided trends into 3 types: Major, Intermediary, and Minor. Minor trends are fluctuations inside Intermediary trends, which are themselves fluctuations inside Major trends. In this image, I've drawn Major trend components in red, Intermed. in orange, and Minor in yellow.

Minor trends aren't very useful and Dow considered them to be distractions, noise, so we'll ignore them. Notice how during the bull run the Intermediary trends kept forming higher highs and higher lows, that's the very definition of an uptrend.

A bull market is simply a Primary trend going up, so we were in a bull market. But not just any bull market, a parabolic bull market, since the trend was accelerating, getting always more vertical, higher prices in smaller times.

Dow called each of the Intermediary trends "Swings" on the Primary trend. A Successful Swing (in an uptrend) happens when price makes a higher high, followed by a higher low. A Failure Swing happens when price fails to overcome the previous high and breaks the previous low.

A Failure Swing is a reversal pattern, from it, you can derive other patterns you probably know: Double Top, Triple Top, Head & Shoulders... (And their bottom counterparts).

Dow also divided each trend into 3 phases.
For bull:
I) Accumulation, when smart money starts buying;
II) Public participation, when retail investors notice the trend and start buying;
III) Excess, when the media starts calling the general public attention.

For bear:
I) Distribution, when smart money starts selling;
II) Public participation, when retail investors start selling;
III) Panic, when the broader public starts panic selling.

I've drawn these phases in green and purple.

Dow Theory gave us 4 signals the bull run was ending/ended:
1) At 17k, when price couldn't overcome the previous ATH, starting a Failure Swing (that's when I started selling a little);
2) At 15k, when the Parabolic trend line was broken (sorry @parabolictrav) (I sold more);
3) At 12k, when price broke the previous low, thus confirming the Failure Swing (Here I sold the bulk of what I planned on selling);
4) At 11k when price swung again - twice - at the previous low, but was unable to break it.


For 1), according to Dow, we even had one more signal: the low volume. Volume confirms price action.

Should price break our previous low @ ~5.9k, Panic phase begins, possibly taking price to one of the accumulation regions of the bull run: ~4k and 2.6k.

(Remember: Support and resistance are regions, not solid lines.)

With this, I hope you can better understand where all TA springs from, thus learning to use it correctly. For more info on Dow Theory and everything TA related, read this book: amazon.com/Technical-Analysis-Financial-Markets-Comprehensive-ebook/dp/B00BWVKM4U