The Dow theory is a theory that says the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high and is accompanied or followed by a similar advance in the other average.
Even though it is more than a hundred years old, the Dow Theory is still relevant in the current trading market. This is because by understanding Dow Theory, traders can benefit from spotting and exploiting trends in the market.
The line charts are used for Dow theory. minimum look up period should be 2 years and the duration of trend forecasting can be for 2 months.
One of the main techniques used to identify trend reversals in Dow theory is peak-and-trough analysis. A peak is defined as the highest price of a market movement, while a trough is seen as the lowest price of a market movement.
Dow was of the view that any run whether bullish or bearish must be confirmed with High volumes. If the volumes are small, it means that market trend is still not confirm. So, when markets rise, it must be accompanied with High volumes, and even when market falls, it should also comprise higher volumes for the trend to be confirmed.
Understanding technical analysis support and resistance. … Support represents a low level a stock price reaches over time, while resistance represents a high level a stock price reaches over time. Support materializes when a stock price drops to a level that prompts traders to buy.
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