Dow Johnes theory - really a one of the greatest person in the Forex trading analysis. It is one of the best and most popular methods of definition of the main trend of the Forex market. Its bases contain in Charles Dow's published by him during the period with 1900 for 1902 in daily newspaper The Wall Street Journal based by him the works. Dow Johnes theory has been modified in the first decades of 20 centuries by such researchers, as S.A.Nelson, William R.Gamilton and Robert Rea.
Seven postulates of the theory of Dow Johnes:
FIRST
All essential information on the market contains in the average prices (indexes), first of all in Dow - Johnes industrial and transport indexes. Indexes reflect the information on knowledge, moods, opinions and activity of all traders of the Forex market and, hence, give full representation about all processes influencing demand or the offer of Forex market.
SECOND
There are three basic trends of the Forex market. The long-term trend of the prices of shares refers to as a primary trend. However any trend is not capable to move long time in the chosen direction, therefore on change primary there comes the secondary trend opposite to it representing correction first, longer. And at last, small trends are the daily fluctuations of the price influencing only on activity of traders, working on small time horizons, and indifferent Dows for the theory.
THIRD
The primary growing trends known as well as the "bull" markets, will usually consist of three movements upwards. The first movement upwards - result of accumulation of shares the most acute traders during decline of economy at presence of positive forecasts. The second movement of the prices upwards is formed, when traders start to buy up ctions{shares}, learning{finding out} about increase of incomes of the company. And last wave of growth - result of purchases of shares wide layers of the population as consequence of a stream of favorable financial news. Usually at last stage of growth in the market speculators prevail.
FOURTH
The primary falling trends known also under the name of the "bear" markets, will usually consist of three movements downwards. The first movement of shares downwards is caused by sales of the most acute traders which understand, that cost of shares is excessively high, and rates of growth of profits of the company cannot be kept for a long time at the given level. The second movement of the prices downwards - result of the panic arising when the sellers scared by absence of buyers, aspire to leave as soon as possible from the market. Last movement of the prices downwards is caused by a catastrophic wave of sales in connection with necessity for money resources.
FIFTH
Movement of one of indexes should prove to be true movement of another. A signal about the beginning of the "bull" trend is rise of both indexes above maxima of their previous secondary growing reactions to the "bear" trend. A signal about the beginning of the "bear" trend is falling both industrial, and transport Dow - Johnes indexes up to a level is lower than minima of their previous secondary reactions to the "bull" trend. Movement to a new maximum or a minimum of one of indexes is not significant. We shall notice, however, that one of indexes quite often before another gives a signal about change of a trend. In Dow Johnes theory does not contain instructions on size of the period of time after which acknowledgement of a signal by other index becomes void.
SIXTH
The prices of closing of indexes are taken into account only. Price movements within day are not considered.
SEVENTH
The primary trend is considered valid until the signal about its change will not be sent by both indexes.