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.
The Dow Theory forms an important part of technical analysis. Its principles help traders to understand the market better and identify price and volume movements more accurately.
Line chart is used for Dow Theory. The Line Chart with a minimum of two years data is used to forecast the trend for two to three months.
The following steps help in determining the market trend using Dow Theory:
- Take the data of two years and plot it into Line Chart.
- Mark the tops and bottoms
- Qualify the tops and bottoms for Bottom, Higher Bottom, Top, Higher Top.
- Look for the 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 Bearish trend.
Dow Theory gives only the market direction for a longer duration of two to three months. This theory does not provide indication for shorter duration. Dow Theory does not provide the Buy/Sell signal
to predict the target. Dow Theory ranks top in any analysis because it gives the accurate trend which has been used and proven for many years.