The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

(sohrab1953) #1
THE HAnDbook of TEcHnIcAl AnAlysIs

of lines being formed. Lines are simply narrow horizontal ranging formations on
the daily chart. They are usually formed in anticipation of some significant news
or economic announcement. These narrow consolidations usually result in strong
breakouts. Dow Theory recognizes lines as potentially profitable formations, even
though they are essentially regarded as minor trends. A line is the only tradable
formation under Dow Theory other than inflection point breakouts in the primary
trend. See Figure 2.14.
We see that each of the three trends is defined by its duration and extent. We
shall now look at primary trends in a little more detail.


primary trends have three phases


Primary or major trends have three phases. A primary bull or bear market consists
of the following three phases:



  1. Accumulation phase

  2. Trending phase

  3. Distribution phase


Accumulation normally occurs after a deep and rapid decline in prices fol-
lowing companies releasing very negative data. The uninformed market par-
ticipants are usually extremely bearish at this point, selling off whatever shares
they have left at any price available. The better informed market participants
start accumulating shares at extremely cheap prices. The accumulation phase
normally lasts longer than the distribution phase due to less capital and profit
at risk.
The trend phase consists of the uptrend and downtrend phase. The uptrend
phase is driven by market participants expecting higher prices after an accumulation.


fIgure 2.14 Example of a Line on the Daily Chart of the GBPUSD.
Source: MetaTrader 4

Free download pdf