Stock trading is to buy or sell the stocks. The basic idea of Dow Theory is that market price action reflects all available information and the market price movement is comprised of three main trends.
The basic principles of Dow’s theory are:
1. The Averages Discount Everything.
2. The Market Has Three Trends – i) Primary trend
ii) Secondary trend
iii) Minor trends
3. Major Trends Have Three Phases.
i) Accumulation phase
ii) Public participation phase
iii) Distribution phase
4. The Averages Must Confirm Each Other.
5. Volume Must Confirm the Trend.
6. A Trend Is Assumed to Be Continuous Until Definite Signals of Its Reversal.
If a trend is bullish, it will have Higher Bottom – Higher Top Sequence with high volume. If a trend is bearish, it will have Lower Top – Lower Bottom Sequence with high volume.
In the bullish trend, when the price movements go above the previous top, the stock have to be bought. In the bearish trend, when the price movements go below the previous bottom, the stock have to be sold.