How the Three Parts of the Dow Theory Can Be Used in Forex Trading

by Andrew McGuinness     Jul 16, 2019

If you've taken a course on economics, you've probably already heard of the Dow Theory. The Dow Theory, developed by Charles Dow over a century ago, was created during a time in which it was considered foolish to try to predict how the stock market would move. At the time, many consumers and even prolific traders believed that the world of stock trading had a will of its own, and wasting time trying to predict how the market would move could not be quantified down to a set of laws. However, the Dow Theory rocked the market by providing simple and reliable sets of rules that could be followed for more prolific trading.

You may be wondering how the Dow Theory fits into Forex trading. After all, if you've spent any time reading about the best Forex trading strategies, you've probably heard experts tell you that the worlds of Forex trading and stock trading are totally different. What can you learn from the Dow Theory if you're interested in trading Forex instead of stocks? The truth is that, though the spheres of Forex trading and stock trading follow very different rules when it comes to strategizing, the overarching parts of the Dow Theory can still be applied. Read on to learn more about the three parts of the Dow Theory and how they can be applied to the world of Forex trading.

Primary movements. Primary movements are the biggest and most important movements on the stock exchange. If you've taken a course in economics, you probably know them by the terms "bull" and "bear" movements; if not, you've probably seen the fluctuations up and down in the market firsthand when thinking about how the prices of things like groceries and petrol change over years of time. These concepts can also be applied to the Forex market; just like the American economy can be particularly strong or weak, so can the economy of the world. In an upward, or "bull" market, when the world's major economies are doing well (the American, British, European, and Japanese markets), you can expect other economies with whom they trade to prosper as well. On the opposite side of the coin, when the world's major economies are experiencing a downward "bear" market, you will be able to see it reflected in the values of the smaller trading partners of these nations.

Secondary movements. Secondary movements are temporary fluctuations in price, value, or movement that go in the opposite direction as the primary movement. In the context of Forex trading, these changes in currency value can scare many beginning investors and cause their emotions to influence their trading, especially during a bull market. For example, if the value of the American dollar experiences a temporary decrease in value against the Japanese yen, some beginning traders may panic and sell off their dollars without being able to recognize that the dollar will soon rise again in value. Being able to recognize a secondary movement and distinguish it from a true turn in the market can make or break a Forex trader.

Daily fluctuations. Daily fluctuations on the Forex trading market can be influenced by a number of events, and can include everything from political elections, the movement and announcements of international corporations, and natural disasters. Just like secondary movements, daily fluctuations will not influence the overall direction of the market; however, knowing about them in advance can help them whether temporary shifts in the market and make smarter trades.

Though stock trading and Forex trading may be different and require individual educations, there are plenty of lessons that Forex traders can learn from the Dow Theory and the stock market

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