Dow Theory: Current Relevance
AAA
  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
Dow Theory: Current Relevance

Dow Theory: Current Relevance

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

  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
Dow Theory: Current Relevance
RELATED TERMS
  1. Absolute Percentage Growth

    An increase in the value of an asset or account expressed in ...
  2. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...
  3. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...
  4. Capital Loss Coverage Ratio

    The difference between an asset’s book value and the amount received ...
  5. Derived Investment Value (DIV)

    A valuation methodology used to calculate the present value of ...
  6. Policyholder Surplus

    The assets of a mutual insurance company minus its liabilities. ...
  1. How do I calculate earnings per share with simple capital and complex capital structure?

    Learn the difference between simple and complex capital structures and how the structure affects a company's calculations ...
  2. Does gross profit account for sales returns?

    Discover how accountants record the return of a saleable item and how that might impact the gross profit for a firm, either ...
  3. What is the difference between an income statement and a balance sheet?

    Find the current value of a business by reading the balance statement and determine whether operations are efficient by analyzing ...
  4. What are the differences between operating expenses and cost of goods sold (COGS)?

    Discover the differences between operating expenses and cost of goods sold, how each are calculated and why they are considered ...
Related Tutorials
  1. Basics Of Technical Analysis
    Trading Strategies

    Basics Of Technical Analysis

  2. Industry Handbook
    Investing Basics

    Industry Handbook

  3. Ethical Investing Tutorial
    Fundamental Analysis

    Ethical Investing Tutorial

  4. Investing For Safety and Income Tutorial
    Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  5. Discounted Cash Flow Analysis
    Fundamental Analysis

    Discounted Cash Flow Analysis

Trading Center