Star Theory for Trading: A Practical Guide from Beginner to Professional Investor

Why You Need to Know Dow Theory

Dow Theory is not just an old theory developed over 100 years ago, but the foundation of technical analysis that remains valuable and widely used today. Regardless of which investor you are, if you want to understand market behavior and price movements, studying Dow Theory is indispensable.

Why is technical factor analysis as important as studying company fundamentals or economic statistics? The answer lies in the fact that Dow Theory can provide a clear overall picture of market trends and help investors make faster and more accurate decisions.

History and Fundamentals of Dow Theory

No matter which school of thought you follow, Dow Theory originated from the creative mind of Charles H. Dow and was further developed by William Peter Hamilton in the early 20th century. Dow observed stock market behaviors and wrote articles in The Wall Street Journal about patterns in price movements.

Through careful study and observation, he summarized key principles, believing that stock prices move in waves similar to the ocean. Sometimes they follow large waves (Primary Trend), and sometimes they dip in smaller waves following minor trends. This concept became the basis for investors worldwide.

The Core of Dow Theory: Prices Reflect All Information

Dow Theory holds the core belief that markets or stock prices—whether commodity prices, Bitcoin prices, or index levels—have already incorporated all available information. This is reflected through the price.

Whether it’s future profit forecasts, competitiveness data, or legal and regulatory risks, all of this is already reflected in the price.

Therefore, studying and analyzing prices from the Dow Theory perspective means understanding what the market is telling us at any given moment.

Structure of Trends: 3 Levels You Must Know

Understanding price trends is central to Dow Theory. This theory divides price movements into 3 levels based on time frames:

Primary Trend (: The major direction of the market

This is the longest movement, often lasting from 200 days to several years, sometimes up to 3-4 years.

Think of the Primary Trend as the main or overall inclination of the market—an indicator of whether the market is in an uptrend or downtrend.

) Intermediate Trend ###: The middle waves

This is a medium-term movement lasting approximately 3 weeks to 3 months. These secondary trends often occur within the Primary Trend.

If the overall trend is upward (Primary Uptrend), there may be corrections along the way, which are Intermediate Downtrends. This presents opportunities for short-term traders to enter trades at the right price.

( Minor Trend ): Daily fluctuations

This is the shortest-term movement, lasting no more than 3 weeks. It is visible on daily or hourly charts.

Although Minor Trends seem less important, they are the playground for short-term traders.

How Trends Rise and Fall: How to Know Where the Market Is Going

Dow Theory states that prices will move in one of the following patterns:

In an Uptrend (

A clear characteristic is that prices will make higher highs )Higher High### and higher lows (Higher Low), gradually lifting the price upward.

For example, gold prices rise from $1,900 to $2,000 (new high), then dip to $1,950 (new higher low), and then go to $2,050 (another new high). This is typical of an Uptrend.

( In a Downtrend )

Conversely, in a downtrend, prices make lower highs (Lower High) and lower lows ###Lower Low(, indicating a declining trend.

Imagine a room where both ceiling and floor are gradually lowering.

) In a Sideways Trend (

Prices do not make higher highs or lower lows consistently. They just fluctuate within a range, seemingly waiting for a clearer direction.

3 Key Phases of Each Trend: Trading Opportunities

Based on Dow Theory, a proper investor understands that each major trend has 3 phases:

) Accumulation Phase (: When informed investors start buying

This is the initial phase of a new upward movement. Prices are still low because the market has not yet recognized the positive outlook.

Interestingly, during this phase, professional investors who have studied fundamentals quietly begin accumulating, seeing hidden upside potential. Technical traders usually stay out because the trend is not yet clear.

) Public Participation Phase ###: The market recognizes and agrees

This is when prices start to rise significantly. Trading volume increases, good news begins to surface, and discussions grow.

This is the golden period for short-term traders because the trend is clear, prices are rising steadily, and profit opportunities increase.

( Distribution Phase ): When informed investors start to exit

The final phase of the uptrend, where prices surge rapidly, and the market is full of positive news, attracting many retail investors.

However, at this point, large investors ###who understand the market( begin to sell gradually to lock in profits. Entering at this stage is very risky because a market reversal may be imminent.

Main Principles of Dow Theory: 6 Key Points to Remember

Besides understanding market trends, Dow Theory has 6 fundamental principles:

Point 1: The market discounts all information - All data, known and unknown, is reflected in the price.

Point 2: There are always 3 levels of trends - Investors must recognize which trend level they are observing )Primary, Intermediate, or Minor###.

Point 3: Every trend develops in 3 stages - Accumulation, Public Participation, Distribution.

Point 4: All signals must confirm each other - For example, if one index rises, another should also rise to confirm the trend.

Point 5: Volume must support the trend - When prices go up, trading volume should increase; when prices decline, volume should also increase.

Point 6: The trend will continue - By default, prices will follow the existing trend until clear signals indicate a reversal.

Double Bottom and Double Top: Reversal Signals

Double Bottom (Two lows) appears when prices hit a low, then rise, and then dip again to a level close to the previous low. This pattern signals that the downtrend may be ending and an uptrend could begin.

Conversely, Double Top ###Two highs( occurs when prices reach a high, then fall back, and then rise again to a level near the previous high. This pattern often indicates that the uptrend is ending as selling pressure increases.

When Dow Theory Works: Advantages

Dow Theory has several strengths:

• Simple fundamentals - Clear and straightforward principles, no need for complex calculations.
• Market direction insight - Helps investors identify the main trend, making trading planning easier.
• Volume confirmation - Not just price, but volume is also considered, strengthening trend validation.
• Versatility - Can be applied across various traded assets without relying on potentially unstable economic data.

When Dow Theory Fails: Disadvantages

However, there are drawbacks:

• Confirmation delay - Sometimes it takes time for the market to confirm signals; prices may move ahead of confirmation.
• No fundamental analysis - Dow Theory focuses only on price movements, ignoring company quality or economic fundamentals.

Trading Strategies Based on Dow Theory

If investors intend to trade using Dow Theory, choosing the right tools is crucial. Using a CFD )Contract for Difference( system is recommended.

With CFDs, investors can trade both long and short positions. If the analysis suggests an uptrend, they can place a Buy order; if a downtrend is expected, they can place a Sell order to profit.

For example, after analyzing gold prices and observing Higher Highs and Higher Lows, an investor might:

• Place a Buy order
• Set an appropriate Lot Size
• Adjust Leverage according to risk appetite
• Define entry points, take profit, and stop-loss levels

This approach, based on Dow Theory, helps investors plan carefully and manage risks more effectively.

Summary

Dow Theory is not an infallible scientific method for predicting markets, but a reasonable approach that has stood the test of over 100 years. Its principles are clear, practical, and adaptable to various traded assets.

Therefore, whether you are a new investor or experienced, understanding Dow Theory thoroughly can improve your trading effectiveness.

For those interested in CFD trading and wanting to practice before using real money, free demo accounts with virtual funds are available. You can also trade stocks, crypto, gold, indices, and currency pairs within a single account.

Warning: Investing involves risks and may not be suitable for everyone. Study thoroughly and manage your funds carefully before trading with real money.