Theories of analyses

The Dow theory was named after its creator - an American financial journalist, Charles Henry Dow (1851-1902), who, in addition to being one of the founding editors-in-chief of the Wall Street Journal, was also one of the pioneers of technical analysis. One of the oldest and still operating American market indicators, the Dow Jones Industrial Average (DJIA) index, is also credited to him. At the beginning, the index created by the DOW consisted of 12 components, today it shows the stock market value of the 30 most important companies in the United States of America. The Dow Theory - which has proven to be timeless to this day - was published by A.C. Nelson in the columns of the Wall Street Journal in 1902, after Dow's death. The basic theses of the theory:

The most revolutionary innovation of the Dow theory was the thesis that, in addition to demand and supply, the market price reflects all available information, including expectations, and can therefore be used to predict future events.

Based on the theory, there are three trends in the market at the same time, which are determined by the time frame. The trend itself can be defined as the general direction of the market price movement. We distinguish between primary, secondary and minor trends, which exist simultaneously on the market. The most important is the primary trend, based on which it can be determined whether we are talking about a bull or a bear market. The length of the primary trend is typically more than a year, but it can even span a decade. The secondary trend is in the opposite direction to the first one, a significant decrease in what is essentially a bull market, or a rally in a bear market. A secondary trend usually lasts from a few weeks to a few months. The third, minor trend can be characterized as a daily fluctuation of exchange rates, its direction is completely random, its length can range from one or two days to several weeks. In addition to the time period, the three trends are also distinguished by the fact that while the minor and possibly the secondary trend may be able to be manipulated by larger institutional investors (e.g. investment banks, hedge funds, sovereign wealth funds, pension funds), the primary trend cannot be influenced.

Among the three trends, the primary trend is the longest, it can last for years, and it itself consists of three phases: the accumulation phase, the public participation phase, and the distribution phase . The development of individual stages within the trend can be explained by the different degrees of information of the market participants. In the first stage (in the event of a bull market), the most informed investors start buying, followed by technical analysts in the second stage. This, the second part of the phase, is characterized by the revival of the market, increasing turnover, rapidly rising prices and optimism. In the third stage, risk-averse investors also appear on the market in the hope of profit, but at the same time, well-informed investors start to leave the market.

According to the Dow theory, indices must confirm each other ("concept of confirmation"). Hamilton (June 25, 1928) writes about this: "Dow has always ignored the movement of one index, if it was not confirmed by the movement of another index in a similar direction. The experience, since the death of the Dow by tracing the movement of the indices back in time, it confirms the theory." Although the volume of transactions does not indicate a trend reversal, the increased turnover strengthens the trend, which can thus serve as a good secondary indicator. The trend continues until a clear signal of a change in direction is received. To determine trend reversals many tools of technical analysis help investors.

The creation of Fibonacci number theory is attributed to the Italian Leonardo Fibonacci (ca. 1170–1250), who is considered one of the greatest mathematicians of the Middle Ages. His theory is based on a mathematical example of the growth of an imaginary family of rabbits. From the derivation of the problem, we get a (infinite) sequence of numbers - the Fibonacci sequence - where each term of the sequence is equal to the sum of the two preceding terms. 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, etc. The resulting series has specific properties:
• after the first six numbers, the quotient of any member of the series or the number preceding it is 1.618. This ratio is called the golden ratio and can also be found in nature (e.g. pine cones, snail shells),
• after the first six numbers, if any number is divided by the next member of the series, the result approaches 0.618. Correction stages can be observed in market trends, and Fibonacci levels help in determining the expected extent of the correction. Although the 76.4% and 50% levels are not Fibonacci ratios, traders take them into account when determining resistance/support levels during trading. The Fibonacci correction number series, based on the full correction (100%), can be determined by dividing the corresponding numbers by 1.618:
100% / 1.618 = 61.8%
61.8% / 1.618 = 38.2%
38.2% / 1.618 = 23.6%

Since many market participants also monitor Fibonacci levels, they trade based on them, so they have a self-fulfilling role, so to speak. To draw the levels on the graph, we draw horizontal lines for a designated minimum and maximum price, marking the 0% and 100% levels, and divide the distance between them based on the Fibonacci correction levels. Regarding Fibonacci correction levels, we can formulate the following rules of thumb:
• 61.8% have the ideal correction level. If the correction of the exchange rate does not break through the 38.2% level, there is a high probability that a trend-strengthening figure will be created.
• If the exchange rate breaks through the 38.2% level, there is a high probability that the exchange rate will also reach the 61.8% correction level.
• In the event that the exchange rate breaks out of the 0-100% range, there is a high probability that it will reach the 161.8% correction level.

Ralph Nelson Elliott (1871–1948) is the creator of one of the most well-known theories of technical analysis, and published his theory - which is still used today when examining exchange rate movements - in a series of articles in the columns of the Financial World magazine in 1939. The theory states that capital and money markets do not move chaotically, but show repeated fluctuations of different sizes and lengths. In Elliott's wave theory, the movement of prices is basically determined by three elements:

• the shape, which refers to the shape of the waves, the wave patterns,
• the ratio, which enables the measurement of the relationship between the waves and the more precise definition of the turning points,
• helps in more precisely defining the time, i.e. the length of the cycles, the shape and the ratio.
The Elliott cycle is based on the following 8-stage pattern. Two trends can be observed in the figure, one rising and one falling, the rising trend consists of 5 waves, and the correction following the rise consists of 3 waves. The local high points of the impulse wave are marked by the numbers 1, 3 and 5, and the minor corrections in the upward trend are marked by the local low points 2 and 4. After the five-stage ascending wave is completed, a three-stage corrective wave begins, represented by points A, B, and C. In Elliott's wave theory - similarly to the point in the Dow theory, according to which 3 trends dominate the market at the same time - waves exist at several levels. The main waves, which determine the major trend, can be broken down into smaller waves and consist of a set of minor trends.

The development of the wander theory is attributed to Burton G. Malkiel (American economist), whose theory - with which he questions the applicability of both technical and fundamental analysis to determine the expected direction of exchange rates - was published in 1973 in A Random Walk Down Wall Street ) c. in his book. By wandering, Malkiel means a movement where the further direction of the exchange rate movement cannot be predicted from the previous movement. According to Malkiel and his followers, stock prices move like this, their changes are unpredictable, and therefore investment advisors, complicated graphs and indicators have no practical use. Followers of the theory believe that above-average returns can only be achieved by taking greater risks.
Malkiel says in his book: "Ultimately, this theory says that if a blindfolded monkey throws javelins at the financial section of the newspaper, the group of stocks selected in this way will be no worse than the one compiled by experts with the most careful consideration". The theory was put to the test by the Wall Street Journal, and after the first hundred days, the "monkeys" (a blindfolded staff member of the Wall Street Journal) proved to be better than 39% of the professionals, and as time went by, this ratio continued to improve.