Price

Price

The Fundamental Principles of Technical Analysis are based on the Dow Theory with the following main thesis:

1. The price is a comprehensive reflection of all the market forces. At any given time, all market information and forces are reflected in the currency prices.
2. Price movements are historically repetitive.
3. Price movements are trend followers.
4. The market has three trends: primary, secondary, and minor.

The primary trend has three phases: accumulation, run-up/run-down, and distribution. In the accumulation phase the shrewdest traders enter new positions. In the run-up/run-down phase, the majority of the market finally "sees" the move and jumps on the bandwagon. Finally, in the distribution phase, the keenest traders take their profits and close their positions while the general trading interest slows down in an overshooting market. The secondary trend is a correction to the primary trend and may retrace onethird, one-half or two-thirds from the primary trend.
5. Volume must confirm the trend.
6. Trends exist until their reversals are confirmed. Example of reversals in a bearish currency market. The buying signals occur at points A and B when the currency exceeds the previous highs.


A reversal of bearish currency

Cycles of currency price change are the propensity for events to repeat themselves at roughly the same time and are an important ground to justify the Dow Theory. Cycle identification is a powerful tool that can be used in both the long and the short term. The longer the term, the more significance a cycle has. The top of the cycle (C) is called the crest and the bottom (T) is known as trough. Analysts measure cycles from trough to trough. Cycles are gauged in terms of amplitude, period, and phase. The amplitude shows the height of the cycle, the period shows the length of the cycle, the phase shows the location of a wave trough.



The structure of cycles


The two gauging measures of a cycle: period and phase.