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Trading theories
It might be helpful to describe Japanse Candlestick analysis as the ABCs of technical analysis, price patterns and indicators as the sentences and trading theories as the chapters.
Theories do not generate signals, they are not a type of analysis – a trading theory is a broad explanation of market and/or participant behaviour.
How to use trading theories
All traders need to subscribe to a concept of how a freely traded market works. It is on these frameworks analysis techniques are developed.
We know from research that about 70% of price moves happen in only 20% of the time – as a trader looking to profit from price movement do you think it would be useful knowing when this 20% is happening and whether it was a bear or bull market? That is what subscribing to the right trading theory should help you answer.
We are going to cover three theories in this course: Dow theory, Elliott wave and the four market stages.
- A trading theory is a broad explanation of how freely traded markets work – effectively how participant behaviour changes.
- 70% of price moves happen in only 20% of the time.
- Understanding a broad theory will help you have an appreciation of when these moves are occurring.
