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The First Real Market Trading System

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Market Trading System

Slow and Steady Wins the Market Trading System Race

Just as criminals allegedly adopt a single preferred method of operation and then stick to it throughout their twisted careers, so too do market players often make a conscious decision to play the market according to their own self-imposed market trading system. In many cases, these systems have been in existence for long periods of time and have gained legions of devoted fans. One of the oldest and most closely-watched systems is explained below.

The Dow Theory Market Trading System

Probably the most famous market trading system is the well-known Dow Theory postulate, which holds that there are several basic facets that explain how the market operates.

• There are three main movements of the market, which are the primary trend, the intermediate contrary reaction, and the short swing. These three cycles move in distinct and separate phases that can end up either reinforcing or counteracting each other.

•  The market itself exhibits a distinct trend, which typically manifests itself in a life cycle containing three basic components. The accumulation phase where educated investors and insiders make their play, the absorption phase where the general investing public catches the trend and pushes it up or down, and the distribution phase where the ones who got in early now get out of the trend and take their profits from the latecomers.

• The presumed trend is only a Dow Theory trend when it exhibits a number of complementary factors. The markets must move promptly in accordance with any new information, must include all tightly associated market subsectors in the trend movement pattern, and must be proved by high volumes of trades.

If, for example, the industrial average and the transportation index are both moving in the same direction, are both showing high share volumes, and are both moving in accordance with the most recent news, they would be considered to be indicative of a general market trend in one direction. If some of these indicators are moving in one direction and some in another, it may indicate temporary uncertainty or perhaps offer an early signal of a trend reversal.

Since this particular market trading system was refined by Charles Dow over a period of fifty years of close market observation and has remained profitable ever since the Nineteenth Century, it is safe to say that there might be something in it.

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