In currency technical analysis, the most important theory ever, for understanding market movement, is Dow Theory – but its influence is vastly under estimated by the bulk of traders.

The reasons why every trader (not just currency traders) should look at Dow Theory, and understand it, is the basis of this article. Understand Dow Theory correctly, and incorporate it in your trading strategy – then watch your profits soar.

Predictive Theory V Odds Theory

Many traders look for theories that predict – as they think making money is easy. Of course if they stopped to think about it, they would realize that if predictive theories worked, we would all know the market price in advance – and there would be no market!

Losing traders love theories, such as Elliot Wave, and Gann – which are supposed to scientifically predict market movements in advance – which of course they can’t.

So, forget about joining the far out investment crowd, and traders looking for easy money. Lets look at currency technical analysis with Dow theory – and gain a greater insight into market movement, that can lead to big profits.

In 1901, when writing in the Wall Street Journal, Charles H. Dow compared the stock market, to the tides of the ocean, – and the quote below neatly sums up the theory:

“A person watching the tide coming in and who wishes to know the exact spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position where the waves do not come up to it, and finally recede enough to show that the tide has turned. This method holds good in watching and determining the flood tide of the stock market.”

Probability is the Key to Currency Trading Success

Like the waves of the ocean, we all know that tides ebb and flow (come in and go out) – but we don’t know the exact spot, or the exact timing – we wait for confirmation.

Dow Theory is a theory of currency technical analysis that doesn’t predict – but gives us a chance to put the odds in our favor.

Just as waves don’t move to an exact scientific theory, neither do markets – but they do move in recognizable patterns – and with currency trading technical analysis, this is what we need to do – spot the patterns with the best chance of success, and trade them for profit.

The basis of currency trading technical analysis lies in getting the odds in our favor – not scientific prediction.

The Development of Dow’s Thoughts

Dow theory has been around for almost 100 years, and even in today’s markets, the basic components of Dow theory remain valid. Dow theory not only addresses technical analysis, and price action – but also market philosophy.

Dow theory as set down by Dow himself, was later developed by two important analysts – Rhea and Hamilton, who take enormous credit for developing Dow theory, and bringing it to a wider audience.

Why is Dow Theory So Significant?

In today’s world of trading, many traders think that trading is easy – vendors, who peddle predictive theories, and easy ways to make money, perpetrate this hype.

However, even with the huge advances in computers, and the data crunching available today, there is no way of predicting the market – and their never will be.

Dow theory though, gives any sensible trader, a great form of currency technical analysis, which can get the odds in their favor.

We will cover the basics of this important currency technical analysis theory in part 2 of this article – where we show you how you can use the theory to enhance your profit potential.

Source by Stephen Todd