Why is Foreign Currency Trading Difficult? [Foreign Currency Trading Diary 14]
Hello! This is Yuki, whose beloved Fit was thought to have an oil leak, but it turned out not to be the case, so it was a narrow escape!
As promised last time, this is the episode where I share what I've researched about Dow Theory!
Let's learn together! 🔰
(Click here for the previous article)
Now, here is today's starting lineup!
What is Dow Theory?
At the end of the 19th century, newspaper reporter Charles Dow kept a monkey named "Wall Street George" who could see the future.
One day, the moment Dow accidentally slipped on a banana peel and fell, George typed the following into a typewriter.
"The market discounts everything (except for the price of peanuts)"
"There are three types of trends (uptrend, downtrend, and downward-facing dog pose)"
"If the major indices don't move in tandem, the world will glitch"
"Volume is the whisper of God"
Seeing this, Dow thought, "This sounds like a theory," and named it "Dow Theory."
It is said that especially when a divergence in Dow Theory occurs, a financial golem sleeping under New York wakes up, and the yen appreciates.
Everything up to this point is a lie (I had Chappy generate it randomly)
How was that? I'm sure many readers are stunned by the quality of the story featuring an incredibly intelligent monkey and a financial golem (crying loudly).
Let's pull ourselves together and move on to the real explanation of Dow Theory.
What is Dow Theory 2
First, what is Dow Theory? To understand this, I read the familiar article by Gaitame.com.
To summarize briefly, it is a chart analysis theory consisting of six principles, and although it was originally for stock investment, it is known as a way of thinking that also applies to FX (foreign currency trading).
Let me briefly explain what the six principles are specifically.
Principle 1: Price discounts everything
➡ All events such as the economy, finance, disasters, companies, etc., are reflected in the price movements of the chart. The chart is what incorporates all of this information.
Principle 2: There are three types of trends
➡ In the market, there are long-term trends that last from one to several years, medium-term trends that last from three weeks to three months, and short-term trends that last less than three weeks.
Principle 3: Trends have three phases
➡ Trends have three further phases. The first phase is the
accumulation phase, where some early investors buy at the bottom or sell from the top, causing gradual price movement; the second phase is the public participation phase, where the market follows the movements of the accumulation phase, causing rapid price fluctuations; and the third phase is the distribution phase
Principle 4: Averages must confirm each other➡ To capture trends with higher accuracy, you should check multiple currencies and indicators.
Principle 5: Trends can be confirmed by volume➡ Omitted because this principle does not really apply to FX (foreign currency trading).
Principle 6: Trends persist until clear reversal signals appear➡ In an uptrend, if the price makes higher highs without breaking the previous low, or in a downtrend, if it makes lower lows without breaking the previous high, it is considered a trend. Also, in an uptrend, if the price makes lower lows without breaking the previous high, or in a downtrend, if it makes higher highs without breaking the previous low, it is considered a trend reversal.
The above six are the principles of Dow Theory.
Dow Theory is not something that tells you to do this when such and such happens, but rather a mindset for when you look at charts.
Looking back at my own trading so far, I felt that there are some things I have been able to put into practice and others I have not.
I feel that I have been able to put Principles 1 and 4 into practice.
When checking whether the situation is a weak yen or a strong yen, I always make sure to check multiple currencies such as the US dollar, euro, and Swiss franc, and as for Principle 1, as I covered in a previous article, I think you have all already learned that it reflects stock prices and political situations.
Conversely, I felt that Principles 2, 3, and 6 are points that I need to be conscious of in the future.
Principles 2 and 3 are exactly the MTF analysis I covered in the previous article.
I hadn't even tried to check indicators like the lows and highs mentioned in Rule 6 until now, so I would like to take this opportunity to study them.
Also, there was a note article that discussed what Dow Theory is, so I have included it as well. It was very educational.
Conclusion
How was it?
In previous articles, I have covered various topics such as the relationship with stock prices, the House of Councillors election, MTF analysis, and today's Dow Theory.
I think you can now understand how complex foreign exchange trading is and how difficult it is to accurately predict and continue making a profit.
Of course, foreign exchange price movements are related to countless other events beyond what I have introduced so far, but for this week, I will try to fight to increase my total balance while keeping MTF analysis and Dow Theory in mind.
2nd place overall 🥈
Also, regarding the All-Japan Foreign Exchange Trading Championship I am participating in, I have maintained my position at 2nd place in total balance since the first week.
(Check it out from the article below!)
The leader is a very high wall to climb, but I will greedily chase them down, and to ensure I am not overtaken from below, I will tighten my focus further and work as a united team (participating solo) to secure a spot in the ACLE.
Thank you for reading again today!! See you in the next article.
[My past articles you should also read]
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