Dow’s theory is mainly applied to the stock market, but like other technical analysis theories, it can also be properly adjusted and applied to various investment markets according to different characteristics of different markets.
According to Dow Theory, there are three trends in the stock price movement, the most important of which is the basic trend of the stock, that is, the change of the stock price in a broad or comprehensive way. This change usually lasts for one year or more, and the total increase (decrease) of stock price is more than 20%. For investors, a long market is formed when the basic trend continues to rise, and a short market is formed when the trend continues to decline.
The second trend of stock price movement is called the secondary trend of stock price. Because the secondary trend is often opposite to the movement direction of the basic trend and has a certain restraining effect on it, it is also called the correction trend of stock price. The duration of this trend varies from three weeks to several months, and the range of the rise or fall of the stock price is generally 1 / 3 or 2 / 3 of the basic trend of the stock price. The third trend of stock price movement is called short-term trend, which reflects the changes of stock price in a few days. Correction trend usually consists of three or more short-term trends.
Among the three trends, long-term investors are most concerned about the basic trend of stock price, which aims to buy stocks in long market as much as possible and sell stocks in time before the formation of short market. Speculators are more interested in the correction trend of stock price. Their aim is to make short-term profits. The importance of short-term trend is small, and it is easy to be manipulated, so it is inconvenient to be the object of trend analysis. Generally, people can’t manipulate the basic trend and correction trend of stock price. Only the national financial department can make limited adjustment.
Technical analysis studies the past price and trading volume data, and then forecasts the future price trend. This type of analysis focuses on the composition of charts and formulas to capture major and minor trends and identify buy / sell opportunities by estimating the length of the market cycle. Depending on the time span you choose, you can use either intraday (every 5 minutes, every 15 minutes, every hour) or weekly or monthly technical analysis.