Dow Theory and Wave Theory Core Contents and Defects CXM Foreign Exchange Analysis

First, Dow Theory

Main content:

1. The index will reflect all information in advance: it is believed that the change in the daily closing price can reflectforeign exchange marketThe overall judgment and emotions of current and potential participants.

2. Take the volume-price relationship as the background: the price trend is usually reflected by the trading volume, which contains the flow of funds and the possible changes in the price. Therefore, when making trend judgments, the trading volume is a reference indicator.

3. Price action determines the trend: If the high point continues to rise during the continuous rise, and the low point at the time of the fall is also higher than the previous low point, it indicates a bullish trend; if the high point continues to decline during the decline, and the high point of the rebound is always lower than the previous high point, it indicates a bearish trend.

4. Special market: It is usually called sideways consolidation, indicating that the strength of buyers and sellers is equal in this range. But when the price breaks through the upper limit of the range, it indicates that the strength of multiple parties is increasing and the rally is about to appear; when the price falls below the lower limit of the range, it indicates that the bears are strong and the decline is difficult to stop. Generally speaking, the longer the consolidation time and the narrower the range, the clearer the market after the breakthrough.

Flaws: The main goal of Dow Theory is to judge changes in the main trend in the market. Once a trend is formed, it is assumed that the trend will continue until it reverses. Therefore, Dow Theory only considers the direction of the trend, and does not specify the time and location of the trend. It must wait until the trend is established before sending a signal of action. This may cause investors to miss some of the best trading opportunities. In addition, Dow Theory focuses more on long-term trends, and it is difficult to provide investors with clear guidance on specific investment strategies. For example, in the actual trading environment such as CXM Forex, investors also need to combine other tools to assist in judgment.

Second, the wave theory

Basic content:

Whether it is a stock index or a commodity price fluctuation, it is similar to the tides and waves of nature, wave after wave, round and round, with a certain regularity. The inventor Eliot divided this cycle into various cycles of different lengths, each cycle runs according to a specific pattern, that is, 5 waves up and 3 waves down, a total of 8 processes.

Disadvantages: First, the hierarchical analysis of waves is difficult to grasp, and the division of different levels can lead to confusion when using wave theory. For example, for a certain wave, some people think it is the first wave, and some people think it is the second wave; but in a rapidly changing market, the slightest mistake can be very serious, and the consequences of wrong judgment can be quite serious. Moreover, there are many aspects of wave theory that are not fully explained, resulting in excessive subjective randomness in use, and counting waves becomes a matter of individual understanding. For example, when stock indexes or exchange rates do not operate according to the mechanical mode of five liters and three falls, the proponents of wave theory may misinterpret the trend at will. In general, wave theory is a subjective analysis tool that mainly reflects public psychology. The more participants, the higher the accuracy. However, when trading activity is relatively light, it can be artificially created to provide opportunities. For traders in markets such as CXM Forex, it is particularly important to understand these limitations.