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Trading Strategies

Dow Theory

Three Movements
Markets fluctuate in more than one time frame at the same time:

Nothing is more certain than that the market has three well defined movements which fit into each other.

• The first is the daily variation due to local causes and the balance of buying and selling at that particular time (Ripple).



• The secondary movement covers a period ranging from days to weeks, averaging probably between six to eight weeks (Wave).



• The third move is the great swing covering anything from months to years, averaging between 6 to 48 months. (Tide).

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  1. Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trend.


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  2. Secondary movements normally retrace from one third to two thirds of the primary trend since the previous secondary movement.
  


• 3. Daily fluctuations are important for short-term trading, but are unimportant in analysis of broad market movements.

Various cycles have subsequently been identified within these broad categories.

Bull Market

Primary Movements have Three Phases

• Bull markets commence with reviving confidence as business conditions improve.


• Prices rise as the market responds to improved earnings


• Rampant speculation dominates the market and price advances are based on hopes and expectations rather than actual results.

Bear markets

• Bear markets start with abandonment of the hopes and expectations that sustained inflated prices.


• Prices decline in response to disappointing earnings.


• Distress selling follows as speculators attempt to close out their positions and securities are sold without regard to their true value.

Ranging Markets

• A secondary reaction may take the form of a ‘line’ which may endure for several weeks


• Price fluctuates within a narrow range of about five per cent.

• Breakouts from a range can occur in either direction.
  

1. Advances above the upper limit of the line signal accumulation and higher prices;

2. Declines below the lower limit indicate distribution and lower prices;

• 3. Volume is used to confirm price breakouts.
  Dow Theory