Hello wonderful people, how are you today? I hope you're having a fantastic week. I'm ecstatic to be a part of this unforgettable lecture. In this article, I'll share my experience with Psychology of Trends Cycle.
Question 1.
Explain your Understanding of the Dow Jones Theory. Do you think Dow Jones Theory is Important in technical analysis?
Charles Dow created the Dow Jones Theory in 1897. According to the Dow Jones hypothesis, every market behavior of any financial asset is discounted based on the cost of production. He established a hypothesis that claims that market pricing actions have a significant influence on the knowledge available about various market movements and trends. It's a hypothesis that both investors and traders use to figure out how healthy the market is.
The Dow's theory was founded on the concept that the market price takes into account all existing information about a company's operations in a given economy. The basic notion underlying Charles Dow theory was the movement of trends in the market, and it was brought to light before the advent of candlestick charts. A technical framework is what Dow theory is called. Dow theory tells us if the market is trending or not, whether it is bearish or bullish, or whether it is moving sideways.
According to Dow, markets go through main movements that might be upward or downwards, and within each of these trends, there can be a temporary reversal. The psychology underlying the trend or trendless condition of the market is presented by Dow theory as accumulation and distribution. His idea aims to help traders better comprehend the notion of price and volume and make better trading selections by allowing them to observe market trend movements.
IS DOW THEORY IMPORTANT IN TECHNICAL ANALYSIS?
The Dow theory is important in technical analysis because it aids market participants in accurately identifying market movements. Dow's theory is critical since it realistically satisfies trend constraints. According to the theory, for every significant bullish trend, a large number of purchases would validate the trend, which begins with accumulation. Fundamental analysis is recommended as a crucial component of price prediction within that.
The Dow Jones Theory also helps traders avoid acting against market price movement by allowing them to trade with caution and constraints. Traders may readily recognize market patterns using this theory, and if this is done, the trader is guaranteed to make good long-term gains. We may also use Dow's theory to determine when a trend is approaching its end, at which time we should be more cautious in our trading selections. The Dow Jones hypothesis is also beneficial to traders since it emphasizes the importance of market closing price.
Question 2.
In your own words, explain the psychology behind the Accumulation and Distribution phases of the market. (Screenshots required)
Bullish and bearish tendencies show accumulation and distribution, respectively. The psychological influence of the market is the accumulation and distribution phase.
Accumulation Phase Of Market :
Accumulation psychology generally emerges shortly after a sudden or rapid downward movement. More investors are initiating purchase positions during the accumulation period, which keeps the market moving upward. In the crypto market, the accumulation phase refers to a moment when there is a lot of buying going on. When we see an accumulation period, it signifies that the trend has no clear pattern and is hence carried in a dynamic ranging way.
We can see from the screenshot above that the price has broken out of the accumulation phase, and the price of the asset has continued to move upwards as market purchasing intent has increased. During this time, nervous sellers who joined the market earlier are already selling, allowing huge volume traders to wipe up liquidity. The accumulation phase occurs when the price has reached a new low point.
Distribution Phase Of Market :
This phase normally occurs in the marketplace, whereupon the whales begin to close out the positions they took during the accumulation period. When other market participants are more concentrated on purchasing the asset, the large players begin selling what they have previously acquired during the accumulation period. In a market cycle, the distribution phase occurs when price ranges during an uptrend and is followed by a downwards breakdown. Large volume sales generate selling pressure in the marketplace, causing the price to fall temporarily. As more traders begin to close their positions, the upward trend comes to a halt.
The pricing value of the trading asset will slow down and retrace to establish a high point during a downtrend, which is referred to as the redistribution phase. The term "distribution" refers to when traders who have recently entered the market get their positions relocated in loss. Traders take advantage of this opportunity to execute sell orders.
Question 3.
Explain the 3 phases of the market and how they can be identified on the chart
The bullish trend occurs once the market depicts higher indexes than prior movements, while the bearish trend occurs once the market depicts weaker indices than earlier low points. The sideways market occurs once the market swings between support and resistance.
Bullish phase of the market :
When the asset price is going upwards and establishing persistent higher highs and higher lows, we can easily detect an uptrend market by looking at the Market Structure in various time periods. The upward lines is normally support, whereas the peaks are usually resistance. When the market is in an upswing, it means that the market's demand for the traded asset is very strong, indicating that purchasers are now in possession of the marketplaces.
Bearish phase of the market :
The image above depicts a negative trend. As you'll see, the negative trend deals with a decrease in the price of a commodity, and the volume at this moment is strong with considerable volatility. This steady decline is caused by the asset's supply, which results in lower lows and lower highs. When we see a price go in the other way, it signifies that the number of sellers outnumbers the amount of buyers at that moment in time.
Sideways
The image above depicts a lateral fluctuation in the price of an item. According to the graph, the price is currently caught between horizontal support and resistance levels. In this instance, we may conclude that demand and supply are similar, which is why the price will keep rising to the resistance level before falling back to the support level. Price will remain in this cycle till a breakout occurs. This breakout might be a sustained or reversal breakthrough.
4. Explain the importance of the Volume indicator. How does volume confirm a trend? Do this for the 3 phases of the market (Screenshots required).
Volume indicators are commonly used by traders to determine the intensity of a movement. If the volume is big, it indicates that the trend seems to be either bullish or bearish, so if the volume is low, it indicates that the marketplace is maybe in a neutral phase.
Evidence of the Uptrend and Volume
The asset's volume rises as the price hits a succession of higher highs and higher lows. Whenever this occurs, the asset moves in a positive path and desire for the asset continues to rise as supply decreases. The image below depicts an asset in an uptrend with volume verification.
Volume Indications of a Downtrend
The asset's volume rises as the price hits a succession of lower lows and lower highs. Once this occurs, the asset swings in a negative direction and supply continue to increase while demand decreases. The screenshot below depicts the asset's decline movement and volume validation.
Volume Confirmation on the Sides
The volume of the item somehow doesn't rise here, and the price of the asset is also within a limit. That's because the asset's demand and supply are equivalent. The market here continues to move horizontally from the support level to the resistance level. This stage is most commonly observed during accumulation or distribution periods. The image below depicts a sideways movement of the asset as well as a volume verification.
5. Explain the trade criteria for the three phases of the market. (show screenshots)
Criteria for a Bullish Trend
Investors take their buy entry stance during a bullish trend. To be successful in this role, one must adhere to the following guidelines.
Make assured and validate that the asset's price is rising. In other words, the price is moving in a succession of higher highs and higher lows.
Confirm and ensure that the volume is rising as the price rises.
Confirm a retracement in the opposite direction of the trend, then wait for a reversal before entering a buy position.
Stop loss and take profit levels should be set below the most recent low and above the most recent high, accordingly.
Criteria for a Bearish Trend
Traders will enter a sell position if the trend is negative. To be successful in this role, one must adhere to the following guidelines.
Make assured and check that the asset's price is falling. In other words, the price is moving in a succession of lower lows and lower highs.
Check and ensure that the volume is rising as the price rises.
Confirm a pullback in the reverse direction of the pattern, then wait for a reversal before entering a sell position.
Stop loss and take profit should be placed above and below the most recent high and low, accordingly.
Criteria for a Downward Trend
The preceding principles should be followed in order to take a stance on the sideways trend.
Verify that the asset's price is within the limit. That is price fluctuation up and down inside the horizontal support and resistance area.
Set up a purchase entrance at the support level, a take profit just above the resistance level, and a stop loss underneath the support line.
Set a sell entrance at the resistance level, a take profit underneath the support level, and a stop loss just above the resistance line.
6. With the Trade criteria discussed in the previous question, open a demo trade for both Buy/ Sell positions.
Buy Posistion (XTZUSDT)
The trading view website will be used for the demo trade evaluation, and the deal will be executed utilizing my trading view paper trading account.
As you can see in the chart above, a pair of the XTZUSDT chart was examined. It was a 30-minute chart, and you can see the asset moving in a succession of higher highs and higher lows
At that moment, I place my order. as may be seen under,
Sell Posistion(SFPUSDT)
As seen in the chart above, a portion of the SFPUSDT chart was examined. It was a 5-minute time frame chart, and you can see the asset making a sequence of lower low and lower high movements, as well as the volume growing.
At that moment, I place my order. Please see the position taken here.
Conclusion.
Finally, I'd like to say that the lecturer gave us a really informative lecture. The Dow Jones Theory is significant because it provides a basic explanation for the three distinct stages that may be observed in each financial market. We can readily detect Bullish, Bearish, and Sideways markets using this Theory. The Dow theory also describes the accumulation and re-accumulation phases of a trend, as well as the distribution and redistribution phases of a decline.
Dow theory correctly identified three market phases: uptrend, downtrend, and ranging. The Dow Jones theory also states that price is always backed by volume, which might be high volatility in trending markets or low volatility in range markets.
