How to Apply Dow Theories to Forex Trading

How to Apply Dow Theories to Forex Trading

by Leo Dimilo

One of the biggest hurdles that most beginner forex traders make is not understanding the fundamentals of trading, period. Forget Forex Trading for a second and let's take a look at trading on the whole. Dow Theory is the cornerstone of technical analysis and as you are probably aware, technical analysis is one of the more important aspects of Forex Trading For Beginners.

So what can a beginner forex trader learn from Charles Dow and his theories? Since the Dow Theories are made primarily for the stock market, there are some parts that aren't as relative as others. We are going to examine the things that are....

The first theory that we can directly apply to forex trading is that the market comprises of three trends, the primary, the secondary and the minor trend.

The reason why this is important is because many beginner forex traders focus mainly on one or two time frames and these time frames typically are short term, like the 5,10 or 15 minute trades.

However, it is not enough to just look at these short time frames when trying to find an entry point to a trade. These beginner traders enter what looks like a profitable trade only to watch it whip saw against them. And the thing is, they are left wondering why.

The Primary trend is actually the most important of all the trends because it is usually develop over a period of months or years and is normally pretty easy to identify. This is the overall trend of the currency pair and should not be discounted.

The Secondary trend tends to be a little more erratic but tends to follow the primary trend. This trend typically last from a few weeks to a few months but will ultimately follow the primary trend.

The Minor trend can last for a day to a couple weeks and is typically set off by forex news or some sort of event. The minor trend can actually go against the primary trend.

The second Dow Theory we should focus on is important as it is important to undestand when making trades on any market:

The Trend Remains the Same Unless Confirmed.. In other words, you have heard that the trend is your friend, right? It applies yesterday, today and tomorrow.

The last Dow Theory that I feel is important for forex traders is Volume MUST Confirm the Trend Understanding Volumes of trades is probably one of the most neglected parts of the market yet is more important than you can imagine.

I will give an example:

A lot of times these minor trends that break support or resistance barriers return back within the original barriers after a few minutes. A lot of times, you can accurately judge whether the barrier will last according to the amounts of volume traded when it breaks as well as the amounts of volume traded after the break (in an area otherwise known as trader's remorse).

These are the three main theories that can help beginner forex traders understand how the forex market works.