Satellite Theory: A Modern Trader's Guide: From Fundamentals to Practical Application

Why Should You Know About Dow Theory?

The Dow Theory is not just outdated knowledge; it remains a fundamental framework applied in analyzing markets across all assets, from stocks and commodities to the popular cryptocurrencies today.

Many investors and traders often overlook the importance of Dow Theory. In reality, it is the foundation of technical analysis that has been around for over 100 years, developed by Charles H. Dow and William Peter Hamilton in the early 20th century to create a system that helps humans better understand market movements.

What is Dow Theory? More Than Just Price Charts

Dow Theory does not analyze just numbers or market value but studies the rhythm of market movements based on the behavior of buyers and sellers.

In the concept of Dow Theory, the prices we see on charts are not just figures; they reflect all available information—from profit forecasts of companies, shortages in the market, to investor psychology at different times.

The 6 Principles of Dow Theory You Need to Understand Deeply

Principle 1: The Market Discounts Everything (

All that happens in the market—good news, bad news, forecasts—are reflected through the price. Therefore, viewing price charts correctly allows you to see the overall market picture.

) Principle 2: There Are 3 Levels of Trends

• Primary Trend ###Main Trend(: Long-term, lasting 1-4 years, representing the main market direction.
• Intermediate Trend )Secondary Trend(: Medium-term, from 3 weeks to 3 months, acting as a correction within the primary trend.
• Minor Trend )Short-term Trend(: Short-term, no more than 3 weeks, representing daily volatility.

Short-term and long-term traders must understand which trend they are in to plan appropriately.

) Principle 3: Every Trend Has 3 Key Phases

Phase 1 - Accumulation ###Accumulation Phase(: Stakeholders start buying when prices are still low; the trend is not yet clear, and signals are subtle.

Phase 2 - Public Participation )Public Participation Phase(: Prices clearly rise, assets are frequently discussed, trading volume increases significantly—an ideal opportunity for traders.

Phase 3 - Distribution )Distribution Phase(: Prices peak, good news floods the market, retail investors jump in. This is when large investors start to exit, and the risk is highest.

) Principle 4: Confirmation Is Necessary

In the past, Dow used the Dow Jones Industrial Average and the Dow Jones Transportation Average to confirm trends. This principle still applies today; to confirm an uptrend, all signals must point in the same direction.

Principle 5: Volume Must Confirm Price Movements

Prices rise but volume is low? Be cautious—it could be a false breakout. Prices fall but volume is high? Usually, it indicates genuine market decline.

Volume and price should align to strengthen the trend.

( Principle 6: Trends Continue Until Clear Reversal Signals Appear

What goes up will continue to go up until a real reversal signal appears, such as prices failing to reach new highs or forming a “Lower High.”

Market Data Summary: Only 3 Types of Trends

) Uptrend ###Bull Market### - A favorable situation

The chart creates “Higher High” (new highs higher than previous) and “Higher Low” (new lows higher than previous), breaking old support lines and raising the level.

( Downtrend )Bear Market### - An unfavorable situation

Opposite to an uptrend, the chart forms “Lower High” and “Lower Low,” breaking old resistance lines and making new lows.

( Sideways )Range-bound### - A stagnant market

Prices fluctuate between the initial and final levels, unable to form clear Higher Highs or Lower Lows. Traders should be cautious during this phase due to high risk.

Double Bottom and Double Top: Reversal Signals

( Double Bottom - W-Shape

When prices hit the lowest point twice at the same level )or close to### and bounce back up, it signals that the market may have passed the bottom and is ready to rise again.

( Double Top - M-Shape

Conversely, when prices reach the highest point twice at the same level )or close to### and then decline, it indicates a market correction or reversal downward.

Applying Dow Theory to CFD Trading

Once you understand Dow Theory, trading CFDs becomes easier because you can trade both sides.

In an Uptrend:

• Place BUY orders
• Choose lot sizes appropriate for your capital
• Set Take Profit at the next resistance level
• Set Stop Loss below the current support

In a Downtrend:

• Place SELL orders
• Choose lot sizes appropriately
• Set Take Profit at the next support level
• Set Stop Loss above the current resistance

Advantages of Dow Theory

✅ Simplicity with Power - Clear basic principles, not complicated like other systems

✅ Versatility - Can be used for stocks, commodities, or crypto trading alike

✅ Emphasizes Volume - Not just price, but how much real money is flowing in

✅ Independent of Economic Data - Teachers release data anytime; charts reveal the market truth instantly

Disadvantages of Dow Theory

❌ Delay - Waiting for confirmation can sometimes lead to late entries, after the price has already passed the profit point

❌ No Fundamental Analysis - Focuses only on charts; if a company has bad news dropping its value by 50%, Dow Theory might miss it

❌ Does Not Indicate Magnitude - It shows whether prices will go up, but not by how much; other indicators are needed for precise measurement

Summary: Who Is Dow Theory Suitable For?

Dow Theory is suitable for traders who want to understand the market, learn which trend they are in, and have a clear system for decision-making.

Regardless of whether you are a beginner or an experienced trader, Dow Theory provides a solid foundation to see the market more deeply. With proper practice and genuine understanding, trading success will follow.