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Dow theory is one of the oldest theories used to analyse the movement of the market based on demand and supply. It is used for long time investment or trading.
Mr. Charles H Dow is one who absorbed the market instead of the company. He started to study the demand and supply because reaching demand and supply is through price and volume which is transparent to every body.
Using Dow Theory we can derive the trend (ie) if Demand > supply then it is Bullish and if Supply > Demand then it is Bearish. It can be used for weekly or monthly trading only and can’t be used for daily trading / intraday trading.
In 19th century the Dow Theory was invented by Charles H Dow who was editor in Wall street journal news paper
In USA there is a DOW JONES Industrial Average and that index is named after the inventor of the DOW Theory, Charles H Dow
Dow Theory is one of the oldest but very effective and golden concept of identify the trend of the market
There are six principals on which The Dow Theory is based upon
1. Market Discounts Everything
– It means some people spend time in understanding the fundamentals of the company like balance sheets , profits, Sales etc
to determine the price movement, Instead of that If we focus on studding the market is enough because what so ever the fundamental analysis
going to be it is going to reflect in the market
2. There are three kinds of Trends
1. Primary Trend
( It is also known as Major Trend, It is the big picture of the price action like one or two years )
2. Secondary Trend
( It is nothing but the Intermediate Trend which can last for few months or sometime for few weeks in context with Major Trend )
3. Minor Trend
( Minor trend is what we see the price movement in day to day price action it may last for few days to sometimes few weeks in context with Secondary Trend which is already in correlation with the Major Trend )
3. There are Three Phases to the Trend
1. Accumulation Phase ( Some times it is considered as Sideways market )
2. Public Participation Phase ( It is an Up Trend which can be identify by the sequence of its prior Higher Bottoms & Higher Tops )
3. Distribution Phase ( It is nothing but the Down Trend which also can be define by the prior sequence Lower Tops & Lower Top )
4. Averages must confirm each other
– It means two major Indies must be in line with the trend for and example Dow Jones Industrial Avg & Dow Jones Transportation Avg
can not be differ, in case if it happens then there is something wrong which we need to find out
5. Volume must confirm the trend
– It means when you see any price action up or down we must confirm with the volume in context to determine strength the trend
Volume must be Higher when price moves up or price moves down to confirm the trend
6. The trend is going to remain until we see any definite signal
– It simple words ..
NEVER EVER PREDICT THE PRICE OR THE TREND
SIMPLY FOLLOW THE TREND
It is a technical analysis trend to identify the movement of the direction of the market
It is a theory formulated by Charles H Dow to understand the market trend and make a long/Short position accordingly.
It is used to identify supply and demand.
Bullish= Demand > Supply = HB – HT trend with high volume.
Bearish= Supply > Demand = LT – LB trend with high volume.
Never to sell at top and buy at bottom.
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