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. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  2. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  3. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  4. Mass Index

    A form of technical analysis that looks at the range between ...
  5. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
  6. Negative Volume Index - NVI

    A technical indicator that relies on changes in a security’s ...
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The concept of CAGR is relatively straightforward and requires only three primary inputs: an investments beginning value, ...
  2. What trends and data influence after-hours traders the most?

    Learn about the specific information that after-hours traders review to influence their trading.
  3. What are some common traits of undervalued stocks?

    There are a few basic factors found in companies that are worth more than their current stock price.
  4. What are the best indicators for evaluating technology stocks?

    Technology stocks are often some of the most discussed stocks on the news. How can investors spot the company that will roll ...
comments powered by Disqus
Related Tutorials
  1. Basics Of Technical Analysis
    Trading Strategies

    Basics Of Technical Analysis

  2. Ratio Analysis Tutorial
    Fundamental Analysis

    Ratio Analysis Tutorial

  3. Macroeconomics
    Economics

    Macroeconomics

  4. Capital Budgeting
    Investing Basics

    Capital Budgeting

  5. Introduction to Stock Trader Types
    Active Trading Fundamentals

    Introduction to Stock Trader Types

Trading Center