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Dow theory was invented by Charles H. Dow. It is one of the oldest and first concept to understand the share market. It determines the nature of buyer and seller by two very important tools which is available in the market i.e. price and volume. These two tools can be seen by all the persons in the market.
A minimum of 2 years of line charts can be considered for Dow theory and duration for bullish or bearish trend should be minimum 20 working days.
Higher Bottom Higher top sequence – Bullish – Create long position
Lower Bottom Lower sequence – Bearish trend – Create short position
Critics:
1. It does not show the on time results.
2. Does not show accurate results for intraday trading.
3. Does not show what happens in that particular trading day.
Pros:
1. It determines the price trend for the future.
2. Easy to understand the nature of buyer and seller.
3. Good for long term trading.
For Dow theory, a minimum of 1 year chart should be studied. Identify the tops and bottoms on the chart, mark them as higher bottom or lower bottom compare to the previous and vise versa for the tops. Find out the sequence of the tops and bottoms. If it is:
1. Higher Bottom higher top sequence, it means it is bullish and you can create long position
2. Lower bottom and lower top sequence, it means it is bearish and you can create short position in the market.
The duration for the sequence to form should be min. 20 working days to 1 month.
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