dow theory explained

  • The Dow theory is a financial theory that says the market is in an upward trend if one of its averages advances above a previous important high and is accompanied or followed by a similar advance in the other average

  • line chart is used
    minimum 2 years of data is required

  • Steps to determine the market trend using Dow Theory,

    1) Take the data of approx 2 years and plot it into line chart.

    2) Mark the tops and bottoms.

    3) Qualify the tops and bottoms (ex :- Bottom, Higher Bottom, Top, higher Top)

    4) Look for a sequence to find the trend.

    If the sequence is formed with Higher bottom and Higher Top with significant volume it is a Bullish trend.

    If the sequence is formed with Lower bottom and Lower Top with significant volume it is a Bearish trend.

  • Dow theory provides only directional indication and only for the longer duration(2 Months) and does not indicate the shorter reflections in the market.

    But this theory is top of analysis, since it is proven for many years and good for deriving the trend easily.

  • buy stocks when you see a higher bottom to higher top sequence
    sell stocks while seeing a lower top to lower bottom sequence. duration can't be predicted

  • Support is a price level where a downtrend can be expected to pause due to a concentration of demand or buying interest. As the price of assets or securities drops, demand for the shares increases, thus forming the support line. Meanwhile, resistance zones arise due to selling interest when prices have increased.

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