What is Dow Theory?
It is essential to know the Dow theory to better understand technical analysis.
It is essential to know the Dow theory to better understand technical analysis.
The market takes everything into account in its prices. All current, past and future details are already integrated into current asset prices. There are several variables to consider regarding cryptocurrencies, such as current, past and future requirements and any regulation that may affect the crypto market.
Price movements are not entirely random. They follow trends most of the time and can be long term or short term. Market analysts focus on the price of a coin rather than any single variable that causes its price to move. History tends to repeat itself.
The Six Tenets of Dow Theory
The Dow Theory consists of six basic principles. The main move is the “main move”, which is the primary trend and can last from less than a year to several years.
#1 The three movements of the market
It can be bullish or bearish. Then we have the mean swing, a secondary or intermediate reaction that can last anywhere from ten days to three months. It typically recovers between 33% and 66% of the significant price change from the previous average swing or the critical move’s start. Finally, we have a short swing or minor activity that varies depending on market speculation from a few hours to a month or more. These three moves can happen simultaneously, such as a little daily move in a bearish secondary reaction in a bullish primary.
Three phases of market trends
Accumulation Phase: This is when informed investors start buying or selling an asset against the general perception of the market. The purchase price does not change much at this market stage because such educated investors are in the minority.
Acquisition (or public participation) phase: eventually, the market absorbs these “smart investors” and follows their trend.
More and more people are following these trends until rampant speculation begins.
Allocation phase: After huge belief due to the limited asset supply, the price starts to recover as informed investors begin to distribute their assets in the market. As a result, prices begin to fall along with volume.
The stock market discounts all news
The stock market incorporates new information as it becomes available. Once this news is released, asset prices will reflect this further information. Price reflects the sum of all market participants’ hopes, fears, and expectations. Interest rate changes, earnings expectations, earnings forecasts, significant elections, product plans, and more. To see how it works, consider this example.
The stock market averages must confirm each other.
Company A and Company B. Suppose A is a handicraft company, and B is a transportation company. A uses B’s service to ship its product. If A gets more business, B will also get more business because A needs B to transport his goods and vice versa. So, if an investor is interested in investing in Company A, he needs to look at Company B’s performance.
These two averages should move in the same direction. If these two averages diverge, then this is a sign that the market trend may soon change.
Trends get confirmed by volume.
Dow Jones considers volume a minor but essential factor in recognizing price signals. During an uptrend, the book should increase as the price rises. During a downtrend, volume decreases as price falls.
The trends will exist until definitive signals prove that they have ended.
The principle is very similar to Newton’s First Law of Motion, which states that the Dow Jones believes that despite “market noise,” the market is still trending. Determining turnover is not easy.
What is Technical Analysis?
Now that we know the six principles of Dow Theory, let’s look at technical analysis. Technical analysis is a tool or method to predict future price movements of currency pairs, cryptocurrency pairs or stocks. He can be a creative and dynamic person who can help you gain insight into the market. Don’t worry; technical analysis is not difficult or scary! So let’s get started.
When a technical analyst studies a price chart and the technological tools, he must also be aware of the timing he is considering. The length of time a trader chooses depends directly on his personal trading style. Intraday Traders: These traders open and close their positions within the same day. This is why these traders prefer short time frames such as hourly, 15 minute or even 5-minute charts.
Long-term holders can hold positions for weeks, months, and years. These holders find it extremely valuable to use hourly, 4-hour, daily or even weekly charts. The 15-minute chart can be a significant indicator for day traders, but it may not be crucial for long-term traders.
Cryptocurrency Market Cap
Market capitalization = Total amount in circulation * Price of each coin. In other words, it is the product of the amount of currency in circulation and the price of each coin. If “Coin” has 300,000 coins in circulation and each coin is worth $2, coin A’s market cap will be $300,000 * 2 = $600,000.
You can check the market capitalization of the top 100 cryptocurrencies at coinmarketcap.com. Market capitalization is an excellent measure of currency stability. In fact, go to coinmarketcap now to see the Bitcoin market cap. As you can see, the price of Bitcoin has been relatively stable over the past month.