The Dow Theory

Dow theory


Charles Dow is termed as the father of technical analysis. Dow Theory is the foundation of all sort of technical analysis what we perform today. Charles Dow and his partner Edward Jones founded Dow Jones and Company in 1882.

Dow never formulated his theory as ‘Dow theory’ rather William Peter Hamilton, Robert Rhea and E. George Schaefer collectively represented his theory naming Dow Theory from series of Wall Street Journal’s where Dow has written his work explaining the concept of the stock market as a measure of health business conditions in an economy.

He said the overall market trend reflect the business condition which if gauged through trends price chart we can find the direction of individual stocks.

Charles Dow was the first one to make effort and express the general trend of the securities market in terms of the average price of a selected few stocks that represented the average piece as a whole. Using his theory created, he formulated Dow Jones Industrial Index and the Dow Jones Rail Index.

It was believed that at that period of time Rail and industries were the most dominating corporate enterprises, hence the direction of average price chart formulated by Dow in his indices represented the overall trend of the economy.

The Six Basic Tenets of DOW THEORY

Market average discount everything: Market reflects the combined effect of the activities performed by thousands of investors through fluctuations in market price. It is the basket of information that has happened in past, in terms of valuation of securities and indices.
The information includes all the events that have happened, day to day fluctuations, emotions of investors and even natural calamities and all other things that affect the supply and demand for corporate securities.

As soon as any new information is available it gets incorporated in stock price. At this point, Dow Theory agrees with one of the premises of Efficient Market Hypothesis (EMH).
As Dow Theory is mainly concerned with price only and does not deal with fundamentals, so the idea behind this is that the stock price always incorporates all the happenings among the investors which are reflected by prices and using this present and the future trend can be predicted.

Investors look into the indices pattern formed by the fluctuations of prices of different securities and analyze the trend the market is following and then they decide the time of investment.

Trends of Market

The market has three TRENDS: It has been seen that market always moves in trends, that may be upward trend, that has a pattern of rising peaks, downward trend, that has a pattern of successive lower peaks and a sideway trend, where price fluctuations occur but not in a definite upward or downward direction.

Dow said  “Records of trading show that in many cases when a stock reaches the top it will have a moderate decline and then go back again to near the highest figures. If after such a move, the price again recedes, it is liable to decline some distance”.

A trend that follows in the market can be figured into three parts namely Primary, Secondary and Minor which Dow compared with Tide, Wave, and Ripples of the sea.

Dissecting the Trends

The primary trend represents the tide, secondary or intermediate trend represents the wave that makes up the tide and the minor trends behave like ripples on the waves.

The Primary movement of trend usually lasts from less than a year to several years, which can be bullish or bearish depending on the market sentiments of that time duration.

The Secondary or intermediate trend in the market interrupts the progress of price in the primary direction. Normally they last from 3 weeks to several months retracing the primary price change from the previous swing or start of the main movement covering around one-third to two- third of its value (gain or loss).

According to Dow, the Minor trend last from hours to not more than three weeks. This reflects the day to day fluctuations and can be manipulated. The three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary trend in a bullish primary movement.


Phases of Trends

Three phases of Trend: Trend can be framed into three distinct phase namely

An accumulation phase, a public participation phase, and a distribution phase.

Accumulation phase represents the informed buying by most of the smart investors against the general opinion of the market. If the previous trend was down then these smart investors recognize the probability of growth potential of stocks and start accumulation the stocks.

The public participation phase where the trends following investors who follow trend through mathematical tools identify and start participating. This usually occurs when prices have already boosted with the positive business news.

The distribution phase takes place when the bullish nature of market start spreading over media and news channels, economic news becomes better and speculative volume and public participation increases. During this phase, the investors who invested in the first phase start distributing before other start selling their stocks.

With the start of accumulation phase, the market tends to start its move towards the bullish side which further converts to a bull market. As the distribution phase starts, the bear market comes into play.
Fear and panic start spreading among the investors and the smart investors start distributing booking their profit.

The average must confirm each other:  Dow interpreted this by referring to the two indices of railroad and industries that both should show the same direction of the trend as uptrend of one will affect the other in the same sense. As the industry will grow more goods will be produced and there will be need of transportation at large scale hence improving both the business leading to increasing in trend in rail as well as manufacturing industries hence confirming the trend of each other.

The volume must confirm the trend: Dow stated that volume should expand or increase in the direction of a major trend. In an uptrend, volume should increase with an increase in price and lower down with the decrease in stock price. In a downtrend, volume should increase with the price drop and gets lowered as they rally. According to Dow volume was considered as a secondary but important factor in confirming price signals.


The trend remains in effect until it gives definite signals that it has reversed: Dow believed that until a clear signal of reversal is recognized trend will remain same. If there is any change is the price that will be temporary and after some time it will again follow the direction of the trend.

Though the identification of change which is temporary or trend reversal is difficult some technical tools may be used for such prediction.


Bottom Line

Dow theory is among the most widely used techniques to detect the market. Hold a position in the market by getting the concepts of Dow theory to your veins. This difference between an investor and a gambler is that a gambler wildly guesses the market and an Investor predicts the market and concepts like Dow theory are his weapons.

Post Author: Sushant Putatunda

43 thoughts on “The Dow Theory

    Renato Coldwell

    (June 5, 2017 - 6:30 am)

    Truly no matter if someone doesn’t know afterward its up to other people that they will assist, so here it occurs.|

    Kenneth Jalonen

    (June 5, 2017 - 6:30 am)

    I don’t even know how I ended up here, but I thought this post was great. I don’t know who you are but definitely you are going to a famous blogger if you are not already 😉 Cheers!|

      Sushant Putatunda

      (June 13, 2017 - 6:28 am)

      Thanks for the compliment. Please do continue reading our posts.

    Amos Witherbee

    (June 5, 2017 - 6:35 am)

    Useful info. Fortunate me I discovered your website unintentionally, and I’m stunned why this twist of fate did not happened in advance! I bookmarked it.|

      Sushant Putatunda

      (June 13, 2017 - 6:23 am)

      Thanks! Please continue visiting our website.

    Sterling Bernett

    (June 5, 2017 - 6:35 am)

    Hey There. I found your blog using msn. This is a very well written article. I will make sure to bookmark it and come back to read more of your useful info. Thanks for the post. I will definitely comeback.|

    Alphonse Ruppe

    (June 5, 2017 - 6:35 am)

    My family members always say that I am wasting my time here at web, however I know I am getting knowledge daily by reading thes nice articles or reviews.|

      Sushant Putatunda

      (June 13, 2017 - 6:20 am)

      Thanks! Please continue reading our posts.

    Jess Dragt

    (June 5, 2017 - 10:08 am)

    Quality articles or reviews is the key to invite the users to pay a visit the web page, that’s what this web site is providing.|

      Sushant Putatunda

      (June 13, 2017 - 6:12 am)

      Thanks for the appreciation. Please continue reading our posts.

    Florencio Stockwin

    (June 5, 2017 - 10:08 am)

    Hey There. I found your blog using msn. This is a really well written article. I will be sure to bookmark it and come back to read more of your useful info. Thanks for the post. I’ll definitely comeback.|

      Sushant Putatunda

      (June 13, 2017 - 6:12 am)

      Thanks! Please continue reading our posts.

    Cherlyn Bustad

    (June 5, 2017 - 10:13 am)

    Its like you read my mind! You seem to know a lot about this, like you wrote the book in it or something. I think that you could do with a few pics to drive the message home a little bit, but instead of that, this is wonderful blog. A fantastic read. I’ll definitely be back.|

      Sushant Putatunda

      (June 13, 2017 - 6:11 am)

      Thanks for the appreciation. Please continue reading our posts.

    Josh Marchesi

    (June 5, 2017 - 10:13 am)

    hi!,I love your writing very a lot! percentage we keep in touch more approximately your article on AOL? I require an expert in this house to unravel my problem. May be that is you! Looking ahead to peer you. |

      Sushant Putatunda

      (June 13, 2017 - 5:03 am)

      Thanks for your appreciation. Please continue reading our posts.

    Rashad Zapp

    (June 5, 2017 - 10:13 am)

    I’m amazed, I must say. Rarely do I come across a blog that’s both educative and entertaining, and let me tell you, you’ve hit the nail on the head. The problem is something which not enough men and women are speaking intelligently about. Now i’m very happy I came across this in my hunt for something concerning this.|

      Sushant Putatunda

      (June 13, 2017 - 5:02 am)

      Thanks! Please continue reading our posts.

    Major Waley

    (June 5, 2017 - 10:15 am)

    This post is priceless. When can I find out more?|

      Sushant Putatunda

      (June 13, 2017 - 5:02 am)

      Thanks , do continue reading our upcoming posts.

    Joni Vose

    (June 5, 2017 - 10:15 am)

    I go to see every day some websites and blogs to read articles or reviews, however this website presents quality based writing.|

      Sushant Putatunda

      (June 12, 2017 - 3:24 pm)

      Thanks! Do continue reading our posts.

    Quinton Buelow

    (June 5, 2017 - 10:15 am)

    Excellent post! We are linking to this particularly great post on our site. Keep up the great writing.|

      Sushant Putatunda

      (June 12, 2017 - 3:24 pm)

      Thanks! Do continue reading our posts.

      Sushant Putatunda

      (June 13, 2017 - 5:01 am)

      Thanks for the appreciation. Please continue reading our posts.

    تحميل اغانى شعبى 2017

    (June 6, 2017 - 1:27 am)

    Hello,I read your blogs named “The Dow Theory – Investment Prophecy” on a regular basis.Your writing style is awesome, keep it up! And you can look our website about تحميل اغانى شعبى 2017.

      Sushant Putatunda

      (June 12, 2017 - 3:22 pm)

      Hi, thanks for the appreciation. Please continue reading our posts.

    tips for job seekers

    (June 5, 2017 - 7:58 pm)

    My brother recommended I might like this blog. He was entirely right. This post actually made my day. You can not imagine simply how much time I had spent for this information! Thanks!

    business news

    (June 5, 2017 - 8:28 pm)

    Good day very cool blog!! Man .. Excellent .. Amazing .. I’ll bookmark your website and take the feeds also? I’m glad to search out a lot of useful info right here in the put up, we want work out extra techniques on this regard, thank you for sharing. . . . . .

    financial services

    (June 7, 2017 - 10:51 pm)

    I couldn’t resist commenting. Very well written!

      Sushant Putatunda

      (June 12, 2017 - 3:06 pm)

      Hi! Thanks for the appreciation. Please continue reading our posts.

    financial planning

    (June 8, 2017 - 5:21 pm)

    It’s an amazing paragraph designed for all the web users; they will get benefit from it I am sure.

      Sushant Putatunda

      (June 12, 2017 - 3:05 pm)

      Hi! Thanks for the comment, do continue reading our posts.

    article of family

    (June 9, 2017 - 8:06 pm)

    Hi, Neat post. There’s a problem along with your web site in internet explorer, could check this? IE nonetheless is the marketplace chief and a large component of people will leave out your magnificent writing because of this problem.

      Sushant Putatunda

      (June 12, 2017 - 3:03 pm)

      Hi! thanks for your suggestion, will surely try to fix the problem.

    Sushant Putatunda

    (June 12, 2017 - 3:02 pm)

    Thanks for the appreciation Kavin. Please continue reading our articles.

    Sushant Putatunda

    (June 12, 2017 - 3:20 pm)

    Thanks, do continue reading our posts.

    Krystle Krossen

    (June 21, 2017 - 8:49 am)

    Fantastic beat ! I wish to apprentice whilst you amend your site, how can i subscribe for a weblog website? The account aided me a acceptable deal. I have been tiny bit familiar of this your broadcast provided vivid clear concept


    (July 13, 2017 - 4:57 pm)

    ” Heya i’m for the first time here. I found this board and I find It truly useful & it helped me out much. I hope to give something back and help others like you aided me. “


    (July 15, 2017 - 2:43 pm)

    Wow, awesome blog layout! How long have you been blogging for? you made blogging look easy. The overall look of your web site is fantastic, let alone the content!. Thanks For Your article about BrianKanaaheM.Bilal& .


    (August 2, 2017 - 12:22 pm)

    magnificent issues altogether, you just gained a emblem new reader. What may you recommend about your publish that you made some days ago? Any certain?


    (August 2, 2017 - 10:56 pm)

    Thanks for sharing with us..
    very nice article…
    Have a good one…


    (August 28, 2017 - 3:59 pm)

    What’s Happening i’m new to this, I stumbled upon this I’ve found It positively helpful and it has helped me out loads. I hope to contribute & aid other users like its helped me. Great job.

Leave a Reply

Your email address will not be published.
Required fields are marked *