Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Massive Stock Market Price Reversion May Be Days or Weeks Away - 22nd Sep 19
How Russia Seized Control of the Uranium Market - 22nd Sep 19
Dow Stock Market Trend Forecast Update - 21st Sep 19
Is Stock Market Price Revaluation Event About To Happen? - 21st Sep 19
Gold Leads, Will the Rest Follow? - 21st Sep 19
Are Cowboys Really Dreaming of... Electric Trucks? - 21st Sep 19
Gold among Negative-Yielding Bonds - 20th Sep 19
Panicky Fed Flooding Overnight Markets with Cash - 20th Sep 19
Uber Stock Price Will Crash on November 6 - 20th Sep 19
Semiconductor Stocks Sector Market & Economic Leader - 20th Sep 19
Learning Artificial Intelligence - What is a Neural Network? - 20th Sep 19
Precious Metals Setting Up Another Momentum Base/Bottom - 20th Sep 19
Small Marketing Budget? No Problem! - 20th Sep 19
The Many Forex Trading Opportunities the Fed Day Has Dealt Us - 19th Sep 19
Fed Cuts Interest Rates and Gold Drops. Again - 19th Sep 19
Silver Still Cheap Relative to Gold, Trend Forecast Update Video - 19th Sep 19
Baby Boomers Are the Worst Investors in the World - 19th Sep 19
Your $1,229 FREE Tticket to Elliott Market Analysis & Trading Set-ups - 19th Sep 19
Is The Stock Market Other Shoe About To Drop With Fed News? - 19th Sep 19
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Market Trading Dow Theory

Stock-Markets / Stock Market 2017 Oct 16, 2017 - 06:19 PM GMT

By: Christopher_Quigley

Stock-Markets

In the last Market Brief on the 1st October I outlined that the markets were now back on “full bull”. Since then the Dow Industrials have risen 466 points. The main reason I felt confident expressing this opinion was that while the Dow 30 had not experienced  much of a pullback since mid-May (and therefore was very much “overbought”) the Dow Transports had corrected back  to its 200 Daily Moving Average but was beginning to show renewed technical strength. This indicated that the main trend, as defined by the Dow Theory system, had remained in full force.


A number of readers have asked me to explain, in more detail, how such a “correct” technical call could be made. They had come to believe that one could not “trade” Dow Theory. Nothing could be further from the truth. In my experience if you can resolutely learn and apply Dow Theory you will discover the discipline to observe market trend, find it and stick with it. With Dow Theory will not trade often, maybe 2-3 times a year, but your trades will be super-profitable if you stick with the trend until technical correction occurs. This takes courage. In time you will discover that on average 7 out of 10 trades will be winners.  If you progress in your trading to cut your losses early while letting your winners run, sometimes for months or even years, you will then have become a successful “Dow Theory Trader”.

This Dow Trading process was outlined brilliantly by Robert Rhea in his classic book “The Dow Theory” published in 1932. Regarding trading success rate he had this to say:

“The question is frequently asked, “What percentage of trades, timed in accordance with a reasonably competent interpretation of the Dow Theory, will be profitable?” It is the writer’s belief that any trader endowed with ordinary market sense and plenty of patience who has studied and used the averages as a guide through the complete cycle of a bull and bear market should be able to make at least 7 profitable turns out of every 10 efforts and each profitable trade should net a gain in excess of the loss on a trade improperly timed. ….Dow Traders do not watch the tape but play for the important movements and are not concerned with a few points loss or gain.”

For the record, a Dow Theory Trader uses 3 main rules:

 
Rule1. Dow Theory’s Three Market Price Movements.
There are three price movements in operation at one and the same time, in all markets. The first and most important trend is the primary one: the broad upward or downward movements, known as bull or bear markets. These main movements may be of several years duration. The second, and most deceptive movement, is the secondary reaction: an important decline in a primary bull market or a rally in a primary bear market. These reactions usually last from weeks to months. The third, and usually unimportant, is the daily or tertiary movement (tertiary = of third rank).

Rule 2. Determine the Trend.
Successive rallies penetrating high points, with ensuing declines terminating above preceding low points, offer a BULLISH indication.

Conversely, failure of rallies to penetrate previous high points, with ensuing declines carrying below former low points, is BEARISH.

Analysis of such price action is crucial in appraising secondary reactions and are of major importance in forecasting the resumption, continuation, or change of the primary trend.

A rally or a decline is defined as one or more daily movements resulting in a net reversal of direction exceeding three per cent of the price of either average. Such movements have little significance unless confirmed in direction by both averages, but the confirmation need not occur
on the same day.

Rule3. Wait For Both Averages To Confirm.
The movement of both the transport and industrial stocks averages should always be considered together. The movement of one price average must be confirmed by the other before reliable inferences may be drawn. Conclusions based upon the movement of one average, unconfirmed by the other, are almost certain to prove misleading.

Current Practical Application.
To reiterate, the main objective with regard to Dow Theory Trading is to “catch” the main trend and stick with it.

The current difficulty with this method of trading, for those folk who missed the current “Trump Rally”, is how to time a market entry, at a “risk reduced” point. Such a point occurred on the 21st September, as alluded to earlier, as indicated by the Dow Transport Index. This technical trigger worked as both the Dow Transports and the Dow Industrials must confirm a Dow Theory trend. (A trend, once signalled, continues until both indices confirm a change). The fact that the technical weakness was neutralised on the Trannies on that date indicated to seasoned Dow Theory traders that the current bull had gained technical re-confirmation and would, on probability, be “off to the races” again. And so it came to pass.

Unfortunately Dow Theory does not tell us how long a primary market trend will last. (The current bull is old, having commenced in March 2009) Thus while the  market is extended, it still is showing powerful Dow Theory technical strength and shows no sign of weakening but that could change on a dime. For the record the Dow Transport index is the weaker of the two key indices so I would anticipate that this will be the first to signal change of primary trend.

However, if you are missing this “price action” do not “chase the market”. Instead, your task should be to wait for some degree of pull-back, on either of the averages. Once any technical weakness diminishes (and provided the bull trend is still “on”) then enter a long trade and stick with the primary trend it until it changes. If you are wrong, stop out and wait for a clearer signal.

Do not trade for random sake. This will result in trading failure. Thus the most important talents one must develop to succeed as a Dow Theory Trader are: disciplined observation, courage to act and stick with the trend, and patience, patience, patience.

Chart: Dow Industrials: Daily.


Chart: Dow Transports: Daily.


Charts: Courtesy of StockCharts.Com

Christopher Quiqley

B.Sc., M.M.I.I. Grad., M.A.
http://www.wealthbuilder.ie

Mr. Quigley was born in 1958 in Dublin, Ireland. He holds a Bachelor Degree in Accounting and Management from Trinity College Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the stock market in 1989 in Belmont, California where he lived for 6 years. He has developed the Wealthbuilder investment and trading course over the last two decades as a result of research, study and experience. This system marries fundamental analysis with technical analysis and focuses on momentum, value and pension strategies.

Since 2007 Mr. Quigley has written over 80 articles which have been published on popular web   sites based in California, New York, London and Dublin.

Mr. Quigley is now lives in Dublin, Ireland and Tampa Bay, Florida.

© 2017 Copyright Christopher M. Quigley - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Christopher M. Quigley Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules