Virtually any market theory can be applied to any financial exchange, which is also true for forms of technical analysis. The Dow Theory, formulated from 1900 to 1902 by Charles Dow, for the main US stock average, was one of the first; and still has a great deal of applicability for all financial markets, including those for buying and selling foreign currencies. That results from its components relating to all exchanges for the buying and selling of any classes of assets.
The Dow Theory is a form of technical analysis that is based on sector movements within the Dow Jones Industrial Average, which is composed of the largest American stocks. There are six basis components of the Dow Theory, of which all are useful in the technical analysis of market trends in foreign currency speculating, trading, and investing:
• a financial market has three distinct movements, being the main, medium, and short swing patterns;
• market trends also have three phases, which consist of the initial buying by experts, then buying by the public general public when the appeal is widely noticed, and then the selling by experts to cash out with the profits when the asset is fully valued;
• all news is discounted, which is the foundation of the perfect information theory for financial markets;
• financial markets must confirm each other in that there are co-relationships of asset classes the move together, such as housing and lumber;
• trends are confirmed by volume as a true bear or bull market will be revealed by appropriate amounts of buying and selling; and
• trends exist until proven otherwise, which generally means that a 20% drop in an asset class signals a bear market.
All of these can market trends of the Dow Theory can be applied with the proper tools of technical analysis to determine the market trends in the buying and selling of foreign currencies by long term investors. For punters and day traders, there is little relevance of the Dow Theory as the buying and selling action is designed to be transacted before any sort of confirmation can be established.
But for long term investors in foreign currencies, all of the components of the Dow Theory are very useful. Recognizing the different phases of the market is critical for the pricing action. As Warren Buffett has noted about the market trends having three phases: first come the innovators, then come the imitators, then come the idiots.
Recognizing exactly what phase the market is in for the foreign exchange unit is critical for long term profits. With central bankers controlling the direction of the FX market, there is no need to discount the news as it is issued to all at one time over public mediums that inform the world. Due to this heavy intervention by central bankers with unprecedented levels of liquidity however, many traditional co-relationships that were previously profitable have now become money losers for traders. That certainly brings into focus the elements of the Dow Theory requiring technical analysis for the confirmation of market trends in foreign currencies.