Dow Theory evaluates long term trends and useful for long term investments.
The Law of Demand and Supply is very well brought out in the stock market situation.
Line charts are used in Dow Theory.
Invest at Higher tops and higher bottoms and sell at lower tops and lower bottoms.
- : Dow theory distinguishes the overall direction of the market. Normally the market moves in a general direction or trend, it does not do so in straight line. It rallies up to a high peak and then sell off to a low, but in one direction.Upward trend indicates a higher level than its previous day level.So does downward trend where it is lower than the previous sell off low.
- : Line charts are used since we have to study 2 years data for a 2 months look up period. Primary Trend is the major trend in the market which makes it the most important to determine. The primary trend also affects the secondary trends..It will last for between one and three years.Secondary trend moves in the opposite direction of the primary trend or as a correction to the primary trend.
- : Market trend can be determined using the line charts with 2 years data. By marking the tops as higher tops and higher bottoms in the upward trend and in the down ward trend as lower tops and lower bottoms. H.T and H.B indicates Bullish Market and L.T ans L.B indicates bearish market.
- : The main criticism against Dow Theory is that the Investors would act after rather than before or at market tops and bottoms. It does not explain the price behavior of the stocks.But still is the basis on which other theories have been drawn up and the first theory to bring the law of demand and supply in the share market. The theory gives ample evaluation based on line charts for movements of longer duration based on which we can draw up corollary charts.
- : Buy at Higher tops and Higher bottoms and sell at Lower tops and Lower bottoms.It is more suitable for an investment say one to two years in the market rather than short profits or gains.
- : Support level is a financial term that refers to the price level below which a stock will not fall. It is a price level where a down trend will be halted due to concentration of demand.Buyers tend to purchase the stocks at this level. Resistance level refers to a price point where by the upward trend is impeded by an overwhelming level of supply of securities that accumulates at a particular price level.Resistance levels are found at the upper levels of range bound markets.