If you are new to the world of cryptocurrencies and the underlying trading chances are you are loading yourself up on a lot of education.
Same is the objective of this article. It aims to explain and talk about Dow’s theory, its 6 tenets and how you can use them for understanding crypto trading signals so you can make better investment decisions -
Charles Dow is the father of technical analysis who founded Dow and Jones Index in collaboration with Edward Jones.
After a close observation of the trading markets, he came-up with 6 tenets which investors today use as the basis of all technical analysis.
It’s important to understand those 6 tenets which we have explained in detail below -
Tenet #1 - There are 3 types of market trends
● Primary - This is the major trend which is there to stay. In fact, it may stay for as long as three years. A good example will be that of BTC which has been in bullish trend since January 2017.
● Secondary - This trend is what happens to the primary one and it is a self-correcting mechanism. The duration of this trend can last anywhere from a couple of days to several months. For example, the bitcoin price retraces between 33 to 66%. After that it rebounds. This usually happens with the price of a stock or currency hits major resistance.
● Short Swings - This type of trend is also known as minor movement. This trend occurs as a result of some news, or temporary opinion. It can last anywhere from a couple of hours to a month. A good example will be that of when China banned Bitcoin trading. At that time, the price of BTC went down to $3,300. Another one is when hard fork was suspended. That time, its price shot up to $7,800.
Tenet #2 - There are 3 phases to all market trends
● Accumulation phase
This is the phase when investors such as good analysts can analyse and see the future and what is happening which allows them to buy currency at low prices. For example, BTC buyers bought and accumulated this currency till 2016.
● Public Participation Phase
This is when the general public starts coming to the terms of a currency’s worth and starts investing in it in the hopes of making quick profit causing the coin’s price to increase. BTC for example rose from $1,800 to $2,900 followed by $4,000 and $6,000 within a short span on time owing to this phase.
● Distribution Phase -
This is the phase when people who accumulated coins during previous phase start selling it to make profit. Although this phase is yet to come in BTC but there are many investors who got bitcoin at ridiculously low price and then distributed a small section of it when the price hit major resistance.
Markets are efficient - What it implies is that the news and information about a coin or cryptocurrencies will reflects in the price variations of that coin. Therefore, technical analysis can easily help in covering information gap. Crypto price charts come handy in doing that analysis.
Market averages always confirm with each other - What it means is that if the averages of the market reflects opposite trend, then there’s hardly any trend.
Trends are confirmed by volume, always - When a coin is experiencing an upward trend, then the buying volume will increase. An increase in sales volume is a sign of downward trend.
Until there is an unequivocal signal in the, a trend cannot change - Until there’s a sign indicating reversal, the trend will not change. For example, when a trend is bullish, it will have a higher high and higher low. There must be a lower low in order for the trend to shift which is confirmed by a lower high.
When a trend is bearish, it will have lower high and lower low. For it to change, there must be some confirmation by higher low.livejo
Conclusion
Although cryptocurrency is far from its infancy stage, but the educational material available is still limited. Hopefully the post above educated you in some way or the other.
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