Let’s dive into the fascinating world of trading, where the markets have rules—but not the kind written in books. These are the unwritten, almost mystical laws that traders swear by, often muttered under their breath like ancient spells. If you’re new, don’t worry—we’ll keep it casual and fun. Ready? Let’s go!

Market Action Discounts Everything: The Crystal Ball Effect

Picture this: every political scandal, every economic report, and even the collective mood swings of millions of traders are all baked into one thing—the price. It’s like the market is a magical crystal ball that reflects every possible influence.

This idea says that prices are all-knowing:

• Politics? Check.

• Fundamentals? Check.

• Trader psychology? Double check.

You don’t need to read a hundred news articles or decode a politician’s cryptic tweets. The price chart already did that for you. So, stop stressing and start staring at those candlesticks—they’re your fortune-teller.

Price Moves in Trends: Newton Knew It All Along

Let’s talk trends—those beautiful, magical patterns that every trader dreams of spotting early. According to Newton’s first law, an object in motion stays in motion unless acted upon by an external force. Guess what? The same applies to the market.

• If a stock is climbing, it’ll keep climbing until something big smacks it down.

• If a trend is falling, it’ll keep falling until it hits some major resistance or support.

It’s the law of inertia, baby! Trends are like rivers flowing until a dam (or bad news) blocks the flow.

History Repeats Itself: Blame Human Psychology

Ever noticed how markets seem to act the same way over and over again? That’s because humans never change. Greed, fear, hope, and denial—our emotions create repetitive patterns.

Chart patterns like head-and-shoulders or double bottoms exist because traders react to similar situations in the same way. It’s why history repeats itself in the market. The secret to trading success? Learn these patterns and use them to your advantage.

The Dow Theory: The Grandpa of Technical Analysis

Let’s go back to the 19th century, where a guy named Charles Dow created the Dow Jones Industrial Average. Back then, people were trying to understand the market’s behavior, and Dow came up with a theory that still guides traders today.

Here are the key principles of Dow Theory :

1. The Averages Discount Everything

As we said before, everything is baked into the price. The Dow Jones Index isn’t just numbers; it’s a living, breathing snapshot of the market’s soul.

2. The Market Has Three Trends: Primary, Secondary, and Minor

Imagine you’re at the beach, watching the waves crash against the shore. Just like the ocean has its rhythms, the market has its own series of trends. But instead of just "up" or "down," the market moves in three distinct waves—primary, secondary, and minor trends. These waves are like the market’s pulse, each one telling you something important. Let’s break it down:

1. Primary Trend: The Big Wave

The primary trend is the main event, the big wave that shapes the market’s overall direction. This trend lasts the longest and could go on for months or even years. It’s like the tide that determines whether the water is generally coming in (uptrend) or going out (downtrend).

• Uptrend: Bull markets are usually fueled by strong economic growth and increasing optimism.

• Downtrend: Bear markets typically arise during periods of economic decline, pessimism, and fear.

This trend is what everyone’s talking about—the one that drives the big moves. If you catch the primary trend early, you're surfing the market’s giant wave, baby!

2. Secondary Trend: The Wave Rides

Now, within that big primary trend, there are smaller secondary trends—waves that can either help the primary trend or act as corrections. A secondary trend typically lasts for weeks to a few months and can go in the opposite direction of the primary trend for a while. Think of it like a small, powerful wave that disrupts the big tide but doesn’t last forever.

• Uptrend Secondary: In a bull market, this would be a pullback or correction, but the market is still heading higher in the long run.

• Downtrend Secondary: In a bear market, this is a relief rally, where the market briefly goes up before continuing its decline.

Secondary trends can be tricky, like the waves that look like they’ll break but end up fading away. But they’re key to understanding how the market breathes and adjusts within the primary trend.

3. Minor Trend: The Ripples

Lastly, we have the minor trends, which are the tiny ripples on the surface. These are the short-term fluctuations that happen within the secondary trends. Minor trends only last a few days to weeks and are often just noise, like the little splash of water when you dip your toe in the ocean.

While these movements can be exciting for day traders, they generally don’t hold much value in the big picture. Minor trends can cause confusion, making you think the market is doing something completely different, but remember: they’re like little blips. If you’re in it for the long haul, it’s best to ignore them unless you’re trading short-term.

3. Three Phases of Uptrends and Downtrends

Uptrend Phases

1. Accumulation:

   • Everyone’s depressed.

   • Economic news is bad.

   • No one cares about the market.
     This is when smart money sneaks in and buys quietly.

2. Markup Phase:

   • The economy improves.

   • Investors start jumping in.

   • The market begins “climbing the wall of worry” as both fundamentals and technicals align.

3. Distribution:

   • Everyone’s overconfident.

   • Greed is in the air.

   • Prices hit irrational highs.
     People buy without thinking—only to face heartbreak later.

Downtrend Phases

1. Distribution:

   • The mania is still in the air, but there’s no one left to buy.

   • Sentiment indicators can sometimes help spot this phase.

2. Panic Phase:

   • Fear takes over.

   • Everyone wants to sell.

3. Discouraged Selling:

   • Sellers give up.

   • Nobody wants to touch the market anymore.

4. Two Averages Must Confirm Each Other

Here’s a fun Dow Theory rule: The Dow Jones Industrial Average and the Dow Jones Transportation Average must agree before you make a move. For example:

• If one average shows an uptrend but the other doesn’t, it’s a no-go.

• If both agree, it’s time to jump in!

Why? Back in the day, industrial companies made stuff, and railways transported it. If both industries were booming, it meant the economy was in good shape.

5. Volume Confirms Trend Direction

Volume is like the cheering crowd at a football game. If the crowd’s quiet, you know the game isn’t exciting. Similarly, high volume confirms a trend’s strength, while low volume makes it suspect.

6. Only Closing Prices Matter

Forget the noise of intraday price fluctuations. Dow Theory only considers closing prices because they reflect the market’s final decision for the day.

7. Lines Can Replace Secondary Trends

Sometimes, the market moves sideways instead of up or down. These sideways movements—like triangles or consolidation zones—act as pauses before the trend resumes.

Newton’s Law: Most VIP Theory

We’ve already talked about how Newton’s first law applies to the market, but let’s make it crystal clear:

• An object in motion stays in motion: A trend keeps going in the same direction unless something big (like news or sentiment) stops it.

• A trend is intact until proven otherwise: Don’t assume a trend is over until the market clearly tells you so.

Conclusion: The Market’s Unwritten Rules

Understanding the market’s basic assumptions is like learning the rules of a game. Once you know these principles, you can navigate the chaotic world of trading with confidence. Let’s recap:

• The market’s price reflects everything—don’t overthink it.

• Trends are your best friend—stick with them until they break.

• History repeats because humans are predictable creatures.

• Dow Theory gives you a framework to analyze the market’s movements.

• Newton’s law reminds you to respect momentum.

With these assumptions in your trading toolkit, you’re ready to ride the market’s waves, dodge its storms, and, most importantly, have fun while doing it!