CandleFocus Glossary Editor
The Dow Theory, which was the foundation of modern technical analysis, represents the first successful effort to analyze the stock market on the basis of logic and observable evidence. Developed by Charles Dow in the late 19th century, it seeks to gain an insight into the behavior of the overall stock market. The theory was introduced to the public in a series of Wall Street Journal editorials from 1900 to 1902.
The Dow Theory is one of the most respected and widely followed trading strategies in the stock market. It relies heavily on tracking movements of the Dow Jones Industrial Average (DJIA), which is the oldest and probably the most recognized stock market index. The theory holds that the market is in an upward trend if one of its averages, specifically the DJIA and Dow Jones Transport Average, advances above a previous important high, accompanied or followed by a similar advance in the other corresponding average.
The Dow Theory assumes that the stock market follows certain trends. It states that these trends can be divided into three categories: Primary trends, Secondary trends, and Minor trends. The primary trends last between one and three years, and signify a prevailing direction in the market. The theory states that if the trend is up, new highs should be made in both the DJIA and the Transport Average. If the trend is down, both indices should make new lows.
The Dow Theory also stresses the importance of volume. According to the Dow Theory, any trend needs to be confirmed by volume activity before it can be considered a bona fide trend. For instance, if one average rises but the accompanying trading volume is weak then the upward trend may not be reliable and the market could be said to be in a period of indecision.
Despite being initially developed more than a century ago, the Dow Theory is still relevant today and is used by traders as a way to determine the overall trend of the market. In fact, many prominent technical analysis indicators such as Moving Averages and Relative Strength Indexes come from the same principles outlined in the Dow Theory. Although various aspects of the theory have been revised and updated, its core principles remain valid and offer a useful guide for movement in the stock market.
The Dow Theory is one of the most respected and widely followed trading strategies in the stock market. It relies heavily on tracking movements of the Dow Jones Industrial Average (DJIA), which is the oldest and probably the most recognized stock market index. The theory holds that the market is in an upward trend if one of its averages, specifically the DJIA and Dow Jones Transport Average, advances above a previous important high, accompanied or followed by a similar advance in the other corresponding average.
The Dow Theory assumes that the stock market follows certain trends. It states that these trends can be divided into three categories: Primary trends, Secondary trends, and Minor trends. The primary trends last between one and three years, and signify a prevailing direction in the market. The theory states that if the trend is up, new highs should be made in both the DJIA and the Transport Average. If the trend is down, both indices should make new lows.
The Dow Theory also stresses the importance of volume. According to the Dow Theory, any trend needs to be confirmed by volume activity before it can be considered a bona fide trend. For instance, if one average rises but the accompanying trading volume is weak then the upward trend may not be reliable and the market could be said to be in a period of indecision.
Despite being initially developed more than a century ago, the Dow Theory is still relevant today and is used by traders as a way to determine the overall trend of the market. In fact, many prominent technical analysis indicators such as Moving Averages and Relative Strength Indexes come from the same principles outlined in the Dow Theory. Although various aspects of the theory have been revised and updated, its core principles remain valid and offer a useful guide for movement in the stock market.