Dow Theory & Its Relationship to Forex & CFD Trading

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Dow theory provides a valuable explanation for how specific financial markets such as the stock market behave. While the Dow theory was initially constructed based on analysis of the stock market and stock market indices, its application can be successfully extended to other markets, like the forex market.

Dow Theory is based on the concept that any single factor cannot manipulate the financial markets over the long term since no one underlying factor is significant enough to impact the market in a big way.

Therefore, the general trend of the market depends on a multitude of underlying factors. The way that traders can profit is to be aware of the broad market's long-term direction and trade accordingly.

Trading on shorter-term trends and movements in the market tends to involve lots of volatility which increases the risk of making losing trades. However, over several months or even years, a trader can improve his trading chances profitably by focusing on the long-term factors and the long-term trend in the market.

In addition to the long-term trend and the broad market, the Dow Theory also incorporates the concept that the indexes, like the Dow Jones Industrial Average, incorporate and account for every aspect of supply and demand.
Likewise, the prices at which currency pairs trade reflect everything that is happening in the broader forex market, the economy, geopolitics, interest rates, and everything else that can affect the exchange rate.

The Primary, Secondary, and Minor Trends

Dow theory suggests that there are 3 types of trends in financial markets – a primary trend, a secondary trend, and a minor trend.

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