Dow Theory The fundamental principles of technical analysis are based on the Dow Theory with the following main theses: 1. The price is a comprehensive reflection of all the market forces. At any given time, all market information and forces are reflected in the currency prices (“The market knows everything”). 2. Price movements are trend followers (“Trend is your friend”); trends are classified as up trends (bullish), downtrends (bearish) and flat (sideways). 3. Price movements are historically repetitive (“The history repeats”) which results in the same patterns periodically emerging on the charts. 4. The market has three trends: the longest (about 1 year) major, or primary, less enduring (1 month and more) intermediate, or secondary, and rather short (several days or weeks) minor. The primary trend has three phases: accumulation, run-up/run-down, and distribution. In this way, in the accumulation phase of a bullish market the shrewdest traders enter new positions. In the run-up/run-down phase, the majority of the market finally "sees" the move and jumps on the bandwagon. Finally, in the distribution phase, the keenest traders take their profits and close their positions while the general trading interest slows down in an overshooting market. The secondary trend is a correction to the primary trend and may retrace one-third, one-half or two-thirds from the primary trend. In frame of a major trend may be any amount of secondary or minor trends. 5. Trends exist until they are broken and their reversals are confirmed. The buying signals occur at points A and В when the currency exceeds the previous highs.
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