DOW THEORY

*Dow theory is invented by Charles H Dow in 19th century.
*It is used to study market trend.
*On a line chart, mark higher tops & higher bottoms,,lower tops &lower bottoms.If sequence of higher bottom-higher top with significant volume represents bullish.If sequence of lower top-lower bottom with significant volume represents bearish.
*For Dow theory,line charts with minimum 2 years of data is required to forecast.
*The duration of trend is 2-3 months.
*Steps to determine the market trend using Dow theory as follows
*Daily line charts with 2 years of data is required.
*Mark tops & bottoms.
*Identify higher tops & higher bottoms,,lower tops & lower bottoms.*If sequence of higher bottom-higher top with significant volume represents bullish.*If sequence of lower top-lower bottom with significant volume represents bearish.
*Dow theory identifies the market trend but unable to explain price behaviour. The major critics is, it is not suitable for short term trading (intraday trading).*Dow theory remains on top because it explains important concepts demand & supply.
*Support(Buyers zone)-It is the price level where sellers do not wish to sell stocks and price will not go below this level(no supply).*Resistance(sellers zone)-It is the price level where buyers do not wish to buy stocks and price will not go above this level(no demand).