Article No: Brainy's Articles on TA-2200 page 1 of 5 July 2009 Technical Analysis Rev: Apr 2012 This article Dow Theory is NOT free*
Introduction . ) s
t The term Dow Theory refers to a body of knowledge (or collection of ideas) which underpins key n
e aspects of contemporary technical analysis. It was first observed by Charles Dow, and then expanded t
n in numerous writings by others including: William P. Hamilton, Robert Rhea and E. George Schaefer. o
C Dow Theory is very relevant today as a lot of what we know as Technical Analysis is based on the
f o
principles of Dow Theory. e l b
. Dow Theory is mostly to do with interpreting underlying market mood and emotion by looking at the a s T r presence or absence of trends and the nature of any trend, by looking at the performance of key e d b n market sectors, and by studying volume on the price charts. It is very interesting that the original a m e
s proponent of these ideas was the editor of what became a major newspaper. e m
n x
o It is very important for Technical Analysts to have some knowledge of Dow Theory as the basic o r b e principles are very sound, and of great value when they are understood. This cannot be over-stated. l t r . o o n o h
o This article in Brainy's series on Technical Analysis (number TA-2200) provides an introduction to the T i s
t t . a topic of Dow Theory. Some of the ideas discussed here are covered in more detail in other articles in e g m k e r r Brainy's series on Share Trading, or Technical Analysis. Readers are encouraged to see the latest list (
o a 1 f e of Articles in the Share Market Toolbox . n M e i
r f e e r r y l a o e h Who was Charles Dow? t m
S e r
l o o p Charles H. Dow (1851–1902) was the founder and first editor of the Wall Street Journal, and f t
m / e co-founder of Dow Jones and Company. He was the person who devised the stock market index l o s b c e
l which is known today as the Dow Jones Industrial Average (DJIA). a l e c i r i t a a r v Charles Dow did not actually write down what we now refer to as Dow Theory. He talked about it a s a /
e
l extensively and in his editorial writings in the newspaper. Compiling, interpreting and extending the y m l c i o n t Dow Theory body of knowledge was done later by his associates. There are written records of Dow's c r o .
a n e i ideas in the editorials of many editions of the Wall Street Journal in 1901 and 1902. r e a a r h
t b s
t Because he didn't actually write out and publish the “Dow Theory”, we can today read various f r e o l e
c interpretations of the theory, and different wording about the theory. Nonetheless, there are six basic i b e t r o m
r principles of Dow Theory, as explained below. . A o
) w s
F w d D w n
Dow talks about the “averages” P
a t (
i
, s k e
i Throughout Dow's writings, and the subsequent materials on this topic, there is constant reference to o e V r o
f the “averages”. This is a reference to the stock market indexes — the Dow Jones Industrial Average
B s i e DJIA (an index of the industrial or manufacturing companies), and the Transport Average (an index of
e s ' l rail companies, formerly known as the Dow Jones Rail Index, as rail was the major method of shipping y c i t n i r goods around the country). This is a clear reference to key indexes on the US market, but the a a r principle also applies in other markets in other countries. y B r
e v —
e *
f Basic principles of Dow Theory o
e The six basic principles of Dow Theory can be summarised as follows, with more detail in the pages g
a that follow. p
t s •
r The averages (ie. the market indexes) discount everything i f •
e The market has three main movements (market trends) h
T • Primary movements (or market trends) have three phases • Determining the trend • Both averages must confirm • Volume provides additional evidence.
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