Profit from Market Trends with this Proven Trading Technique

Hello viewers. Welcome to the Fast Profits Daily. Myself, Brijesh Bhatia.

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In this video, we will understand the simplest tool of technical analysis, which is known as Dow Theory.

This is the most effective to trade, to invest into the stock market be it cryptos, be it currencies, be it commodities. I think this is one of the 100 years old study, which is still being followed by most of the people worldwide. So let's understand what this theory is all about.

So Dow Theory was introduced by Mr Charles Dow and he used to write in the Wall Street Journal in 1900-1902 where he has created or invented this study.

So he invented the study based on the three most important principles than the past, current and the future prices are discounted into the stock action or index, whatever you are looking at, or the currencies and it reflects into the price action of the stocks or index.

So the most important is that price discounts everything as per the Dow Theory. Let's look at how to identify the trend as per the Dow theory. So there are basically three trends. One is the bullish trend, one is the bearish trends, and when the trend change happens. So first let's understand the bullish trend.

If you look at the screen over here, I have marked 1, 2, 3, 4, 5, which means that the price is going higher and higher. Say 1 is 100, 2 is around 105, 3 is around 102, 4 goes above 110, which from 100 high to 105, and 105 to 110, and then 110 to 115. And the lows from 103 to 106, 106 to 109 which means that the prices forming higher high, higher low structure. It's a sign of a bullish trend.

Vice versa when the prices are forming lower high and lower low, it is a sign of a bearish trend, it's a sign of a bearish trend. The most important is the third one, when the trend changes from bullish to bearish or bearish to bullish.

So if you look at the structure over here, 1, 2, 3, 4, 5, 6, it is a sign of bullish momentum where the price is forming a higher high, higher low structure, and if you look at the seven over here, the previous low of five, which was the higher low, is being taken out. Say higher low would be around 90 and the 7 low could be around 96. The price at 8 goes higher, slightly higher but it doesn't cross the level of 6 and then it falls back below the low of 7, gives a conformation of the trend change has happened.

Vice versa it could be the be the bearish to bullish, where the lower high lower low structure has ended and price forms a higher high and high low structure. So it's a sign of a trend change. It's very, very important as per the Dow Theory. You need to understand this. I'll show some examples also on how to trade this using the charts.

Second, the most important, how to identify the trends. So he has defined three important trends. The first is the primary trend, which is for long term, and he has termed it as the tide. In the modern era, now in this millennium we have been indicating it as a secular trend or the long term trend.

So basically it is identified using the monthly scale chart or the quarterly charts, which I am looking for a long term perspective. More than 5 years, 10 years, 15 years, 20 years, 30 years chart and identifying the long term trend over here.

So if we look at the right hand side of the chart, this is a Sensex chart since 1980 and if you look at the lines over here, the prices are forming higher high, higher low structure. So there was a period between 1992 to 1998 where it consolidated, then again post 2008, started running at the faster pace. But if you look at the structure, it is forming higher high and higher low structure.

So we haven't seen any trend change on monthly or quarterly scale of Sensex as of now. So still, the secular trend or the tide is very, very bullish.

Second in the secondary trend or the intermediate trend which ranges between six months to five years and this can be identified using the weekly scale. I am using the log scale over here for the charts.

Now, if you look at the weekly scale over here in the chart, the secondary, 2008 we saw the breakdown, the black line if you look at the black line over here. So it's weekly scale. On monthly scale, we were still bullish, but on weekly scale, which is secondary trend, it has seen a breakdown in 2008, the black line, which means that the higher high, higher low structure, the previous lows taken out.

Similarly in 2020, if you see the black lines, the higher high, higher low structure was broken down, the with the black line and the previously low being breached, and we saw a sharp correction. So that's the weekly scale.

The third and most important, is the day's trend which is probably swing trading which you people do for one to two weeks, three weeks, a month, and second is the intraday trend, which is identified using the daily chart or the intraday chart, which ranges from one minute, two minutes, five minutes to hourly, two hours, four hours, 75 minutes, 90 minutes, there are any number of people who tried various time frames of the charts.

Now, if you look at their right hand side over here, I have being using any number of swings, which are more compared to the weekly and monthly scale. Here an intraday trader would be very, very much interested in a 2%, 3% move.

So if you look at the swings, it could be around 3%, 4%, 5% moves, and intraday trader or swing trader could be interested in those kind of trends. This can't be identified again using higher high, higher low structure.

He has also identified, additionally, how the market cycle performs. Again this is not a short term cycle, but a long term cycle. So let's look at the long term cycle as per his study.

There are three phases. Accumulation phase, where the stock is accumulated by a large chunk of smart investors, FIIs, institutions. Retail traders are slightly late to identify such kind of accommodation phases going on. There is one theory called Wycoff's Theory which I have been discussing a number of charts in my previous videos. It will help retail traders to understand when the smart investors are buying.

Second is the rally post accumulation phase, the breakout happens. Post the rally, there is a euphoria. In the euphoria, every Tom, Dick, and Harry stock will see a huge of upside momentum and stocks runs like anything. So there is no tomorrow kind of move, which each and every stocks would have in a day in a week time frame. This is where he should be very, very, cautious, in the euphoria phase.

The last phase of market psychology is distribution when the smart investors FIIs, DIIs, institution, big players, exit from their stocks and some distributions are an end to the market cycle and then the market corrects or the stocks correct by a large margin. So you need to keep a watch on this.

So let's look at how trade this Dow theory. I've just identified one example over here in the Sensex.

Now, if you look at the 1 which is the low which I have taken as one, then prices went higher and formed the lower high. If you look at the previous high, it was not taken out.

Now if you look at third, the price breached below the low of one, forming the lower low. Fourth, if you look at the second high, it was not taken out, which means that the lower high is in place. Five, look at the lower low which has been formed. Six a lower high has been formed. Now seven if you look at the lower low, the lowest of all, and 8 if you look at the 8 highs of 6 was taken out over there. But still, I don't have a confirmation that the trend change has happened.

Now, if you look at the 9, the price has formed a higher low. The lows of 7 are not yet breached, but highs of 9 is also not taken out. If you look at 10, the highs of 9 is not yet taken out, but price has again formed higher low at 11. And then the highs of 10 taken out, which I have indicated as 12 as a breakout level.

Now, if you look at the trend line which I have plotted in black over here, it indicates that the previous highs are taken out. Now a breakout has happened in the stock, and if you look at 13, the higher high structure continues into the higher side.

So this is the way you can look at each and every stock, index, currencies, crypto, commodities to identify the short term trend, long term trend, primary trend, the secular trend which is going on in the Dow, and the Nifty and Sensex which is still bullish. It's on the kind of trading you want to do.

If you're an investor, I would use monthly and quarterly scale as a trend decider. Use weekly as an entry point and use a top down approach from monthly to weekly. And if you're a short term trader, you can do a weekly trend, daily trend and enter into the hourly chart or two hour chart of four hour charts.

So that's the way you can trade using Dow theory and in to the stocks, commodities, currencies, cryptos, and every asset class where technical details are available.

Signing off, Brijesh Bhatia.