We are introduced to the Dow’s theory in this sesion. The dow’s theory forms the basis for technical analysis. The idea behind Dow theory is the identification of demand and supply through charts mapped with price vs time. Dow’s theory is criticized on many grounds for taking large time perion and it’s inability to predict the strength of the current trend. Even with all the critics Dow’s theory still remains the basis for technical analysis. The matching of higher tops with successive higher bottoms leading to Buy positions and in the other way matching lower top with successive lower bottom leads to taking a sell position. we also have seen the trends and the meaning of support and resistance in Dow’s theory.
- : Dow theory is a technique used to identify the demand and supply through charts. Here the charts are drawn with two quantities price vs time. And when demand > supply we call it a bullish trend, and when demand < supply we call it bearish trend. With these constraints we evolve strategies.
- : For analysing using dow theory we use line charts and the time period is about two years. Then duration of trend is usually a month or two.
- : we determine the market trend by marking the line chart with relevant tops and bottoms, and each top is matched with the previous top and the relatively higher top is marked -Higher top. similar for lower top and also the same method for bottoms. then when we encounter a simultaneous higher top with a matching higher bottom we can conclude the trend to be bullish, and similarly lower top with lower bottom is an indicative of bearish trend.
- : The major critics against Dow theory are:1)It does not evaluate the present position. 2) It will not give the strength of the trend, in other words the momentum of how bullish or bearish the trend is moving. The reason why the Dow theory still remains in the top of any analysis is the theme of demand and supply relation is spotted, and basically it is the core of technical analysis,and it is very good for solid investors.
- : we ought to buy when a higher top is matched with a higher bottom, and we ought to sell when a lower top is matched with a lower bottom. Basically the demand vs supply patterns govern the Dow's theory.
- : When the current trend is increasing and is gathering momentum we can call it is supporting, but when the trend is oppposed by the counter party it is called resistance. i.e. the movement between the supply's comfort zone and demand's comfort zone.