The Dow Theory developed by Charles Dow has immensely contributed to understanding the price movement of a stock. Despite being one of the oldest theory, the approach still remains very popular amongst the technical analysts for forecasting the market behaviour/ trends.
Dow theory suggests that the price movement of any stock depends on its demand and supply curve in the market. Broadly, this represents three phases of market as accumulation, participation and distribution phases.
It is also significant to note that the theory takes advantage of the price movement and its corresponding volume to define the trend as major, intermediate or short term. The theory encourages the investor to follow the primary trend of the market unless there is a definite signal which indicates the reversal of the current trend.
Despite its popularity, this theory has its disadvantages too. Especially, it has been observed that forecasting a reversal during the beginning of counter trend is very challenging and can only be seen when definite signal is generated i.e. making lower top/ bottom or vice versa. This makes the investors quite sceptic to follow it religiously.
Hence, The Dow theory can be concluded that its concept is pretty popular and if followed with discipline, the trading can be converted into a lucrative business model by following the market rather than predicting the market.
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