If you’ve joined the crypto trend and you’re planning to start trading in cryptocurrencies you need to know how to read crypto charts. If you want to make good crypto trades, you also need to be able to do a sound technical analysis supported by the Dow Theory.
What is the Dow Theory?
At a high level, Dow Theory describes market trends and how they typically behave. It provides signals that can be used to identify the primary market trend. The primary market trend is then used to make trading decisions.
According to the Dow Theory, the market considers everything during its pricing. The current asset prices are a reflection of all existing, prior, and upcoming details of the stock. This means that a market analyst can focus on the price of a coin, rather than every single variable that moves the price of a coin.
Crypto markets go up and down in particular patterns. Being able to recognize the patterns of the market makes it possible to predict market behavior.
6 Tenets of Dow Theory:
1. The market has three movements
2. The major market trends have three phases
3. The market incorporates new information as soon as it becomes available
4. Stock market averages must confirm each other
5. Trends get confirmed by volume
6. Trends exist until it is shown that they have ended
The market has three movements:
The main movement of a market is called the primary movement. It is the major trend in the market and can last anywhere between a year and several years. The main movement can be bullish or bearish.
The secondary or intermediate movement of a market is called the medium swing. This is what happens in a medium time frame – anywhere from ten days to three months. Trends in the medium swing are measured in terms of primary price change.
The minor movement of a market is called the short swing. The short swing is the short-term speculation in the market.
The major market trends have three phases.
The three phases of a market trend are:
1. The accumulation phase – The accumulation phase is when knowledgeable investors start buying or selling the coin against the general perception of the market.
2. The public participation phase – The public participation phase, also known as the absorption phase, is when the rest of the market starts following knowledgeable investors.
3. The distribution phase – The distribution phase happens after the speculation of the absorption phase. Knowledgeable investors begin to redistribute their holdings in the market.
The market incorporates new information as soon as it becomes available
The price of the asset changes to take any new news into account. Asset price is an accurate reflection of the hopes, fears, and expectations of the market participants. The market price integrates factors such as interest rate movements, earnings expectations, revenue projections, major elections, product initiatives, etc.
Stock market averages must confirm each other
If two companies or sectors are causally linked, an increase in one company should increase the other company. If one company’s performance improves while the other decreases, then it might be a sign that a market trend may be reversing soon.
Trends get confirmed by volume
During an uptrend, the volume of shares stranded should increase with a price increase. During a downtrend, the volume should decrease with a price decrease.
Trends exist until it is shown that they have ended
The market remains in trend despite “market noise”. Finding definitive proof for the reversal of a trend is not easy.
Next we will look at Technical Analysis and the elements one should take into account before placing a trade.