Dow Theory: Conclusion
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: Conclusion

Dow Theory: Conclusion

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

Dow theory represents the beginning of technical analysis. Understanding this theory should lead you to a better understanding of technical analysis and of an analyst's view of how markets work.

Let's recap what we've learned:


  • Dow theory was formulated from a series of Wall Street Journal editorials authored by Charles H. Dow, which reflected Dow's beliefs on how the stock market behaved and how the market could be used to measure the health of the business environment.
  • Dow believed that the stock market as a whole was a reliable measure of overall business conditions within the economy and that by analyzing the overall market, one could accurately gauge those conditions and identify the direction of major market trends and the likely direction of individual stocks.
  • The market discounts everything.
  • Dow theory uses trend analysis to determine which way the market is headed.
  • Primary trends are major market trends.
  • Secondary trends are corrections of the primary trend.
  • Primary trends are made up of three phases. For an upward trend, these phases are: the accumulation phase, the public participation phase and the excess phase. For a downward trend, the three phases are: the distribution phase, the public participation phase and the panic phase.
  • Market indexes must confirm each other. In other words, a major reversal from a bull or bear market cannot be signaled unless both indexes (generally the Dow Industrial and Rail Averages) are in agreement.
  • Volume must confirm the trend. The indexes are the main signals that indicate a security's movement, but volume is used as a secondary indicator to help confirm what the price movement is suggesting.
  • A trend will remain in effect until a clear reversal occurs.
  • Dow relied solely on closing prices for determining trends, not intraday price movements.
  • Peak-and-trough analysis is a key technique used to identify trends in Dow theory.
  • Since the advent of Dow theory, more advanced techniques and tools have expanded on this theory and begun to take its place.
  • One problem with Dow theory is that followers can miss out on large gains due to the conservative nature of a trend-reversal signal.
  • Another problem with Dow theory is that over time, the economy - and the indexes originally used by Dow - has changed.

  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: Conclusion
RELATED TERMS
  1. Appraised Equity Capital

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

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

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

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

    The assets of a mutual insurance company minus its liabilities. ...
  6. Net Premium

    The expected present value of a policy’s benefits less the expected ...
  1. 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 ...
  2. 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 ...
  3. What are the differences between gross profit and gross margin?

    Learn how gross profit and gross margin are calculated and how each is used in fundamental analysis. Generally, these numbers ...
  4. 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 ...
comments powered by Disqus
Related Tutorials
  1. Basics Of Technical Analysis
    Trading Strategies

    Basics Of Technical Analysis

  2. Ethical Investing Tutorial
    Fundamental Analysis

    Ethical Investing Tutorial

  3. Industry Handbook
    Investing Basics

    Industry Handbook

  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