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Online stock trading: Dow Theory explanation

Posted By On 9/07/2008 10:06:00 PM Under

1. I am giving an explanation for the waves and their intriguing behavior which differs from each wave. Thus Dow Theory has to be seen in light of below explanations.

a) Wave 4 never overlaps or enters the area of wave 1. An overlap means one should consider the possibility of A-B-C corrective
b) An exception to the above is a 5th wave ending diagonal
c) Wave 3 is never the shortest.
d) Wave 3 & 5 are related to wave 1 by a Fibonacci ratio (equality or 1.618 or 2.618)
e) In any corrective, wave C is related to wave A by a Fibonacci ratio (equality or 1.618 or 2.618)
f) In any corrective, wave B is related to wave A by a Fibonacci ratio (0.618 or equality)
g) Compared to impulses, correctives are difficult to trade. There are more than 23 types of patterns. Sometimes the best thing to do is let the market make up its mind and then decide what to do.
h) In an impulse, it is common for a wave 3 or wave 5 to extend.
i) Any correction following a 5th wave extension will typically end at wave 2 of the extension
j) Alternation: if wave 2 is a sideways correction, wave 4 will be fast/ straight/ swift (and vice versa).
k) Waves are fractal and principles apply across all time frames. A 1-2-3-4-5 impulse could be a part of larger A which in turn can be a part of a larger 1

2. Thus one has to use judiciously the Dow theory to get the best from technical analysis.

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