DavidWaring

In yesterday’s lesson we gave an introduction of Dow Theory and looked at the first three tenets which are: markets have three trends, trends have three phases, and the markets discount all news. In today’s lesson we are going to take a look at the second 3 tenets which will finish up our discussion of Dow Theory and give us a strong basis which we can then use to analyze trends and eventually place some trades.

Tenet four of Dow Theory is that The Averages Must Confirm Each Other. The averages must confirm each other. Here Dow was referring to the Dow Jones Transportation Index and the Dow Jones Industrial Average. To understand this point it is important to remember that in Dow’s time the growth in the US was coming mainly from the Industrial sector. These two indexes were made up of manufacturing companies and the rail companies which were the primary method used to ship the manufacturers goods to market. What Dow was basically saying here is that you could not have a true rally in one of the averages without a confirmation from the other because if manufacturer’s profits were rising they would have to ship more goods. This meant that the profits of the transportation companies and therefore the transportation average should rise too. Dow stated that when these two averages moved in opposite directions it was a sign that the market was going to change direction.


Tenet five is Trends Are Confirmed by Volume. What Dow was saying here was that there are many reasons why price may move on low volume, but when prices move on high volume there is a greater chance that the move is representative of the overall market’s view. Dow believed that if many traders were participating in a particular price move and the price moves significantly in one direction, then this was an indication of a trend developing as this was the direction the market was anticipated to continue to move.


Tenet six is that Trends Exist Until Definitive Signals Prove That They Have Ended. What Dow was saying here is that there will be market moves which are against the primary trend but this does not mean that the trend is over and the market will normally resume its prior trend. There is much debate on how to best determine when a definitive signal has been given that the trend is over and this is where our study of technical analysis in future lessons will take us.

Now that you have read this article you should have a basic understanding of the background of how prices move and what market technicians look for as the foundation of their analysis. Next we are going to look at the basics of charts and the different types of charts that traders use to analyze the market.

As always if you have any questions or comments please feel free to post them below, and have a great day!

Unregistered

Great Site. Even better than freetradingvideos.com as you videos are structured from beginners to advanced.

Thanks for sharing yor knowledge as it is hard to find good training on the stoc market.

David Waring

Hi Ryan,

Glad to hear from you and thank you for the compliment I am glad you like the site.

Best Regards,
Dave

themillionaire08

As you mentioned that trend move with volume, in the above example the trend was moving up but the volume declined in the middle, kindly clarify

David Waring

Hi themillionaire08,

Glad to hear from you.

What I am saying here is that healthy trends should be accompanied by rising volume. So in the example I am showing how in the first part of the trend volume is rising along with the trend showing that there is a lot of participation in the move (a sign of a healthy uptrend). Then, in the middle of the trend as you have pointed out, volume starts to decline. So the point I am trying to make here is that the trend is more likely to reverse at that point as falling volume is not indicative of a healthy trend.

Hope that helps. If there are any other questions or comments on this one please feel free to post as always.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

themillionaire08

I hope I'm not asking so many questions, first thanks for the clarification, and another question comes in mind, could we understand that if we're in a long position and we noticed that the volume is declining and the trend is up we can take that as an exit entry, as a reversal is coming in the way.

Thanks..

David Waring

Hi,

Thats what the site is here for so don't worry about asking too many questions.

I personally would rarely look at one input such as volume and base my decision completely on that. I prefer to use inputs such as volume and other indicators as indications of what the market may do, which in combination with other things may lead me to enter or exit a trade.

So for example if there was a major resistance level above the market and the chart started to stall out around that level and volume was declining then this would probably lead me to exit a long trade.

Hope that helps. As always if there are any other questions or comments please feel free to post.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

sphereless

Great site... Best thing I have run into.

I'm a total beginner and have interest in forex trading. Do you think understanding the basics of trading are beneficial to forex? I'm starting with your most basic courses... Should I focus more on the forex section or would all of your courses be beneficial?

Thanks for a great site... I'm fresh out of the military and am looking at trading as a potential career. Any advice would be greatly appreciated.

Russ

David Waring

Hi Russ,

Glad to hear from you and thank you for the compliment I am glad you like the site.

The courses are designed to be taken in order, with the information in the basics of trading course the information that I consider important when trading any market. So with this in mind I would suggest starting with the basics of trading course.

As far as trading as a career goes its important to keep in mind upfront that trading is one of the hardest ways to make money out there, with the large majority of people who try and trade losing money. With this in mind, those who do make it are normally the ones who put in the most work and have a genuine interest in the market that keeps them always digging for more information which sharpens there edge over the market.

Hope that helps. If you have any other questions or comments as you go through the material please feel free to post.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

coronajazz

Hi, David
I finished your basics of trading and Forex trading courses and now I am starting all over from the beginning again trying to analyze everything I had learned better and fill some holes in my knowledge. What I understand from this lesson is that volume is of big importance in any market. In forex it is not that simple to calculate volume because of the big number of banks that interchange, but anyway are there any indicators, websites, forums or anything that can help us determine actual volume of trading and, or liquidity of markets?