Dow Theory is one of the most important trend following theories ever and while its nearly a 100 years old Dow Theory remains an essential method all traders should understand for bigger profits.
Predictive V Odds Theories
Many traders look for theories that claim to predict market movement in advance; these traders are attracted to theories such as Elliot wave, Gann and Fibonacci which claim markets move to a specific natural order which of course they don't and the reason why is obvious:
If prices moved to an objective natural order where we could predict highs and lows in advance, we'd all know the price ahead of time and there would be no market! There's no way of predicting currencies with scientific accuracy but you can get the odds on your side and you can win. You need to forget trying to be perfect and looking for an order which doesn't exist and instead, focus on trading the odds and if you do this, you will make a lot of money with your FX trading system.
Dow Theory and Trading the Odds for Profit
Charles H. Dow in an article in a Wall Street Journal written in 1901 which compared stock market movement, to the tides of the ocean, - and the quote below sums up the logic upon which the theory is based:
"A person watching the tide coming in and who wishes to know the exact spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position where the waves do not come up to it, and finally recede enough to show that the tide has turned. This method holds good in watching and determining the flood tide of the stock market."
Although Charles Dow is credited with developing the Dow theory, it was S.A. Nelson and William Hamilton who later made the theory into the theory which is practised today. Nelson wrote The ABC of Stock Speculation and was the first to use the term "Dow theory." Hamilton further developed the theory through a series of articles in The Wall Street Journal between 1902 to 1929.
In later years Robert Rhea, E. George Schaefer and Richard Russell, all refined the analysis of the Theory further and today, its seen as one of the best trading methods for capitalizing on currency trading price moves for profit.
A theory Applicable to Any Free Trading Market
While Dow theory was originally developed to trade stocks, it will work on any free trading market and that includes currencies and commodities. Just like the waves of the ocean, we know that any free market ebbs and flows, up or down and the challenge is to make money from these moves. These moves are not exactly the same all the time and can not be predicted with science or maths but if you understand Dow Theory you can make money from them.
Dow Theory, is a theory of currency technical analysis, that allows you to trade high odds trading scenarios. Currencies do move in repetitive patterns that repeat EXACTLY every time but the ebbs and flows have certain characteristics which allow you to trade with the odds on your side.
We don't have time to cover the theory in depth in this article but if you understand the theory behind trend following, accumulation and distribution which is presented in the theory, you will understand how valuable they are in any currency trading strategy and how they can lead you to trade the odds correctly and make bigger profits.
Dow Theory and Bigger Currency Trading Profits.
Dow theory is the one theory you need to learn to understand how and why currencies move and if you do learn and understand it, you will have a theory which can lead to consistent profitability in global currency markets.
If you like Dow theory then you should discover Long Term Trend Following which is a strategy based on the concept of big trends and staying with them. It's one of the best ways to trade currencies and offers you bigger potential profits for your work than perhaps any other trading method. Our site has many Profitable FX Trading Methods and they range from swing trading to long term trend following – always keep in mind, that when you choose a strategy, learn it, have confidence in it and match it to your personality.