Dow theory is very important in understanding demand and supply in the stock market. It also helps in determining the entry points and risk calculation in upward/ downward trends. It helps in encashing on the market knowledge of the astute investors and helps in following the market instead of predicting it.
- : This is theory of technical analysis of charts depicting market trends or swings explaining concept behind demand and supply in the stock markets.
- : Dow theory uses line charts. Minimum duration of trend forecasting is 2 years.
- : For determining Bullish market there should be Higher bottom- Higher top sequence. For Bearish trend there should be lower top-lower bottom sequence. For both trends, there should be high volume and no divergence between the Index/ sector and stock.
- : Major critic against Dow Theory is that it's outdated today for highly liquid stocks because of centralised markets. It is also argued that it is unable to predict the price when the upward or downward trends start and thus much of the movement can not be encashed.
- : Using Dow Theory, one should buy a stock in High Bottom- High Top sequence when the price crosses the previous top. On the other hand, one should sell in Low Top-Low Bottom sequence when price falls below previous bottom. Upward trend is reliable till the High Bottom- High Top sequence is followed by Low top Low bottom sequence and a downward trend is reliable till it is followed by High Bottom-High Top sequence.
- : Support is also called as demand zone which the price at which majority of buyers are ready to buy. Resistance is also known as supply zone which is the price at which maximum number of sellers are ready to sell.
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