How Dow theory is used in taking decision for trading.

  • : Dow Theory has been around for almost 100 years, yet even in today's volatile and technology-driven markets, the basic components of Dow Theory still remain valid. Developed by Charles Dow, refined by William Hamilton and articulated by Robert Rhea, Dow Theory addresses not only technical analysis and price action, but also market philosophy
  • : Line charts are usually used for dow theory. The minimum lookup period has to be 2 years to get a clear picture of the trend. The duration of trend forecasting is not specific. It is until we see evidence of a reverse trend.
  • : 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.
  • : Although Dow Theory forms the building blocks for modem-day technical analysis, this theory is not without criticisms. One of the criticisms is that following the theory will result in an investors acting after rather than before or at market tops and bottoms. With Dow Theory, there is an inevitable lag between the actual turn in the primary trend and the recognition of the change in trend. The theory does not recognize a turn until long after it has occurred and has been confirmed. On the other hand, the theory, if properly interpreted, will recognize that primary trend change and will thus never allow a large loss. Dow's contention was that concentrating on any direction change of shorter duration than the primary trend increased the chances of having one's portfolio whittled away by high turnover, many errors in judgment, and increased transaction costs. Therefore, Dow Theory is biased toward late recognition of a change in trend to minimize the costs of wrongly identifying a change in trend. A second criticism of Dow Theory is that the different trends are not strictly defined. Often the interpretation of price swings is difficult to assign to a specific trend type. Secondary trend beginnings often appear like primary trend beginnings, for example. This makes the determination of the primary trend unclear at times and can incite investment in the wrong direction. Others, however, criticize Dow Theory for being too specific about the requirements needed to identify a change in trend. Requiring that only closing prices be used or that any break to a new level no matter how small is significant often places too much emphasis on a small change in price. This is because by understanding Dow Theory, traders can benefit from spotting and exploiting trends in the market.
  • : When you identify a trading opportunity, always look at how the trade is positioned from the Dow Theory perspective. For example, if you consider a long trade based on candlesticks, then look at what the primary and secondary trend is suggesting. If the primary trend is bullish, then it would be a good sign, however, if we are in the secondary trend (which is counter to the primary), you may want to think twice as the immediate trend is counter to the long trade. 3-4 weeks trend will be relisble
  • : The best way to identify the target price is to identify the support and resistance points. The support and resistance (S&R) are specific price points on a chart expected to attract the maximum amount of either buying or selling. The support price is a price at which one can expect more buyers than sellers. Likewise, the resistance price is a price at which one can expect more sellers than buyers.
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