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: 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
RELATED TERMS
  1. Dow Theory

    A theory which says the market is in an upward trend if one of ...
  2. Dow 30

    Commonly referred to as just the "Dow," the Dow 30 was created ...
  3. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average ...
  4. Accelerator Theory

    An economic theory that suggests that as demand or income increases ...
  5. Biased Expectations Theory

    A theory that the future value of interest rates is equal to ...
  6. Random Walk Theory

    The theory that stock price changes have the same distribution ...
RELATED FAQS
  1. How is the Dow Jones Industrial Average used in the Dow theory?

    Discover how the Dow Jones Industrial Average is used in the Dow Theory, which is used by traders to figure out the trend ... Read Answer >>
  2. When was the Dow Jones Industrial Average first calculated?

    Charles Henry Dow was born on a farm in Connecticut on November 6, 1851. Farming didn't suit Charles Dow, however, so he ... Read Answer >>
  3. What are these points that the Dow is always gaining or losing?

    The Dow is a list, or index, of companies considered to be good indicators of the market's strength. Simply put, these companies ... Read Answer >>
  4. Is the Dow Jones a public company?

    Find out how the Dow Jones Industrial Average tracks the health of the U.S. economy. This fluctuating number indicates the ... Read Answer >>
  5. What's the difference between agency theory and stakeholder theory?

    Learn how agency theory and stakeholder theory are used in business to understand common business communication problems ... Read Answer >>
  6. Who or what is Dow Jones?

    Dow Jones, or more precisely "Dow Jones & Company", is one of the largest business and financial news companies in the ... Read Answer >>
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center