1. Dow Theory: Introduction
  2. Dow Theory: The Market Discounts Everything
  3. Dow Theory: The Three-Trend Market
  4. Dow Theory: The Three Phases Of Primary Trends
  5. Dow Theory: Market Indexes Must Confirm Each Other
  6. Dow Theory: Volume Must Confirm The Trend
  7. Dow Theory: Trend Remains In Effect Until Clear Reversal Occurs
  8. Dow Theory: Dow Theory Specifics
  9. Dow Theory: Current Relevance
  10. Dow Theory: Conclusion

By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com

There is little doubt that Dow theory is of major importance in the history of technical analysis. Many of its tenets and ideas are the basis of much of what we know today. Aspects of Dow theory are also incorporated into other theories, such as Elliott Wave theory. (To learn about this concept, see Elliott Wave Theory and Elliott Wave In The 21st Century.)

However, since its original adaptation and subsequent updates, its relevance as a stand-alone analytical technique has weakened. The reason for this has been the advent of more advanced techniques and tools, which in part build off of Dow theory, but greatly expand upon it.

One of the bigger problems with the theory is that followers can miss out on large gains due to the conservative nature of a trend-reversal signal. As we mentioned previously, a signal is confirmed when there is an end to successive highs (uptrend) or lows (downtrend). However, what often happens is that by the time the market has shown a clear sign of reversal, the market has already generated a large gain.

Another problem with Dow theory is that over time, the economy - and the indexes originally used by Dow - has changed. Consequently, the link between them has weakened. For example, the industrial and transportation sectors of the economy are no longer the dominant parts. Technology, for example, now takes up a considerable portion of economic production and growth.

This is important because the basis for watching the indexes is that they are the leading indicators of business conditions. The economy has clearly become more segmented, requiring the analysis of more indexes, which could greatly reduce the accuracy and timeliness of Dow theory analysis. Imagine having to look at six indexes while still adhering to Tenet #4: Indexes Must Confirm Each Other.

Even though there are weaknesses in Dow theory, it will always be important to technical analysis. The ideas of trending markets and peak-and-trough analysis are found constantly within technical writings and ideas. Also of importance in Dow theory is the idea of emotions in the marketplace, which remains a characteristic of market trends.

Charles Dow and Dow theory helped investors improve their understanding of the markets so that they could maker better investments and achieve investment success.

Dow Theory: Conclusion

Related Articles
  1. Trading

    Dow Theory: Introduction

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.comAny attempt to trace the origins of technical analysis would inevitably lead to Dow theory. While more than 100 years old, ...
  2. Trading

    Dow Theory: Conclusion

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.comDow theory represents the beginning of technical analysis. Understanding this theory should lead you to a better understanding ...
  3. Trading

    Dow Theory: Dow Theory Specifics

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.comSo far, we have discussed a lot of the ideas behind Dow theory along with its main tenets. In this section, we'll take a ...
  4. ETFs & Mutual Funds

    Why The Dow Matters

    Although the DJIA only includes 30 stocks, it can tell you a lot about the market as a whole.
  5. Trading

    Elliott Wave In The 21st Century

    Discover new developments that help you apply this difficult theory to trading and how computer power can help reduce the guess-work.
  6. Trading

    Elliott Wave: Conclusion

    By Matt Blackman with Mike Green Contact Matt Here are some principles about Elliott Wave we discovered in this tutorial: The Elliott Wave theory requires a high degree of subjectivity, which ...
  7. Trading

    The Pioneers Of Technical Analysis

    Every time an investor talks about getting in low or picking entry and exit points, they are paying homage to these men.
  8. Trading

    Dow Theory: The Three-Trend Market

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.comAn important part of Dow theory is distinguishing the overall direction of the market. To do this, the theory uses trend ...
  9. Trading

    Modern Portfolio Theory vs. Behavioral Finance

    Modern portfolio theory and behavioral finance represent differing schools of thought that attempt to explain investor behavior. Perhaps the easiest way to think about their arguments and positions ...
  10. Trading

    Dow Theory: Trend Remains In Effect Until Clear Reversal Occurs

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.comThe reason for identifying a trend is to determine the overall direction of the market so that trades can be made with the ...
Trading Center