Brief Insight on How to Read Cryptocurrency Cards

What is Technical Analysis?

The term “technical” refers to the analysis of an asset’s past trading activity and price movements, which technical analysts believe can be useful predictors of future price movements. It can be used for any asset with historical trading data, which implies stocks, futures, commodities, currencies and cryptocurrencies.

Charles Dow, founder and publisher of the Wall Street Journal and co-founder of Dow Jones & Company, pioneered technical analysis. Dow contributed to the development of the first stock index, namely the Dow Jones Transportation Index (DJT).

Dow’s concepts were published in a series of Wall Street Journal editorials, and after his death they were compiled into what is now known as the Dow Theory. In particular, technical analysis has evolved through years of research to include the patterns and signals we recognize today.

The validity of technical analysis is dependent on whether the market has priced in all available information about a specific asset, implying that the asset is fairly valued based on this information. Traders who use both technical analysis and market psychology believe that history will inevitably repeat itself.

Technical analysts can use fundamental analysis in their trading strategy to determine whether an asset is worth approaching, and they can supplement their decisions with analysis of trading signals to maximize profits. Fundamental analysis is the study of financial data that affects the price of an asset in order to predict its future development. Fundamental analysis of a company’s stock can involve examining its earnings, operating performance and brand value.

As technical analysts seek to identify bullish and bearish price movements to help traders make more informed decisions, they are tasked with identifying bullish and bearish price movements.

What is Dow Theory and the Six Principles of Dow Theory?

In 1884, Charles Dow helped establish the first stock market index. The Dow Jones Industrial Average (DJIA) is a price-weighted index that tracks the 30 largest publicly traded companies in the United States. It was created after this index. Dow believed that the stock market was a reliable indicator of economic business conditions and that, by analyzing it, significant market trends could be identified.

The contributions of several other analysts, including William Hamilton, Robert Thea, and Richard Russell, modified Dow’s theory. Some aspects of Dow’s theory, including the emphasis on the transportation sector, have lost prominence over time. While traders continue to monitor the DJT, it is not considered a primary market index like the DJIA is.

The theory has six main principles, known as the six Dow theory principles. Let’s examine them one by one in the sections that follow:

The market reflects everything

The first principle of the Dow theory is one of the fundamental principles of technical analysis, which states that the market reflects all available information in asset prices and prices such information proportionally. For example, if a company is expected to post positive earnings, the market will price the asset higher. The principle is similar to the Efficient Market Hypothesis (EMH), which states that asset prices reflect all available information and trade at their fair value on stock exchanges.

There are three types of trends in the market

Dow’s theory also suggests that there are three types of market trends. Primary trends are significant market movements that typically persist for months or years. Primary trends can be either a bull market or a bear market, in which the prices of assets rise or fall respectively over time.

There are secondary trends within these primary trends that can act against the primary trend. The secondary trends can be pullbacks in bull markets, where asset prices temporarily fall, or surges in bear markets, where prices rise briefly before resuming their downward trend.

There are also tertiary trends, which typically last a week or less and are often considered market noise that can be ignored because they do not affect long-term movements.

Primary trends have three phases

Traders can discover opportunities by analyzing various trends. During a bullish primary trend, for example, speculators can capitalize on a bearish secondary trend to buy an asset at a lower price before it continues to rise. Recognizing these trends is challenging, especially in light of the Dow Theory, which states that primary trends have three phases.

The first phase, the accumulation phase for a bull market and the spread phase for a bear market precedes an opposite trend and occurs when market sentiment is still predominantly negative in a bull market or positive during a bear market. During this phase, savvy traders recognize that a new trend is starting and either accumulate in anticipation of an up move or spread out in anticipation of a down move.

The second phase is known as the public engagement phase. During this phase, the market as a whole recognizes that a new primary trend has begun and either begins to buy additional assets to capitalize on upward price movements or begins selling to limit losses during downward price movements. In the second phase, prices rise or fall rapidly.

During bull markets, the ultimate phase is known as the excess phase, and during bear markets, it is known as the panic phase. During the excess or hysteria phase, the general population continues to speculate as the trend approaches its conclusion. Those who grasp this phase start selling in anticipation of a bearish primary phase or buying in anticipation of a bullish primary phase.

Bull market

Bear market

Accumulation or distribution phase

Marked by negative sentiments

Marked by positive sentiments

Public participation phase

Wider market participants start buying

Wider market participants start selling

Excess/panic phase

Thoughtful market participants anticipate a bearish trend and start selling

Cautious market participants anticipate a bullish trend and start selling

Although there is no assurance about the consistency of these trends, many investors take them into account before making decisions.

According to the fourth principle of Dow theory, a market trend is confirmed only when both indices indicate the beginning of a new trend. According to the theory, traders should not assume that a new primary uptrend is starting if one index confirms a new primary uptrend while another index remains in a primary downtrend.

At the time, the Dow’s primary indices were the Dow Jones Industrial Average and the Dow Jones Transportation Average, which would naturally tend to correlate given the close relationship between industrial activity and the transportation market.

According to the fifth principle of Dow theory, trading volume should increase if the price of an asset moves in the direction of its primary trend, and decrease if the price moves in the opposite direction. Trading volume is a measure of how much an asset has traded over a given period of time and is considered a secondary indicator, with low volume indicating a weak trend and high volume indicating a strong trend.

If the market experiences a secondary bearish trend with low volume during a primary bullish trend, the secondary trend is relatively weak. If the trading volume during the secondary trend is significant, it indicates that more market participants are starting to sell.

Trends are valid until a reversal is evident

The sixth principle of Dow theory suggests that trend reversals should be viewed with suspicion and caution, as primary trend reversals can easily be confused with secondary trends.

What are candlestick charts?

Traders have access to various types of indicators to examine and analyze market trends in cryptocurrencies. Due to the essence of candlesticks, crypto candlestick cards provide more data.