The different theories of technical analysis:
There are a number of theories and concepts that are used in technical analysis to identify patterns and trends in financial markets. Here are some of the most widely used theories in technical analysis, along with examples of how they are applied in practice.
Dow Theory: Dow Theory is one of the oldest and most fundamental theories in technical analysis. It was developed by Charles Dow, the founder of the Wall Street Journal, and his colleague Edward Jones in the late 1800s. Dow Theory is based on the idea that the stock market is made up of three types of trends: the primary trend, the secondary trend, and the minor trend. The primary trend is the long-term trend of the market, while the secondary trend is a short-term correction within the primary trend, and the minor trend is the day-to-day fluctuations in the market.
An example of Dow Theory in practice would be to identify the primary trend of a particular stock or market by looking at long-term price charts, and then use shorter-term charts to identify the secondary and minor trends within the primary trend.
Elliott Wave Theory: Elliott Wave Theory was developed by Ralph Nelson Elliott in the 1930s. This theory is based on the idea that financial markets move in waves, with each wave consisting of a pattern of five upward and three downward movements. The theory also suggests that these waves are part of a larger pattern, with each larger pattern consisting of smaller patterns.
An example of Elliott Wave Theory in practice would be to identify the different waves within a market, and then use these waves to identify potential turning points or trends within the market.
Gann Theory: Gann Theory was developed by W.D. Gann in the early 1900s. This theory is based on the idea that markets move in a series of geometric patterns, and that these patterns can be used to predict future price movements. Gann Theory also incorporates a number of mathematical tools, such as the use of squares and angles to identify potential turning points in the market.
An example of Gann Theory in practice would be to use geometric patterns and mathematical tools to identify potential support and resistance levels within a market, and then use these levels to identify potential turning points or trends within the market.
Japanese Candlestick Theory: Japanese Candlestick Theory was developed in Japan in the 1700s. This theory is based on the idea that the price movements of a market can be represented in a visual way using candlestick charts. Each candlestick represents a single time period, and the open, high, low, and close prices for that time period are represented by the candlestick's body and wicks.
An example of Japanese Candlestick Theory in practice would be to use candlestick charts to identify specific patterns, such as doji or harami patterns, which can be used to identify potential turning points or trends within the market.
These are just a few examples of the many different theories and concepts that are used in technical analysis. Each theory or concept provides a different way of looking at the market, and traders and investors may use multiple theories or concepts in combination to identify potential patterns and trends within the market.