DOW THEORY Meaning and
Definition
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Dow theory is a fundamental concept in technical analysis that provides insights into the behavior and trends of the overall stock market. Named after its creator Charles H. Dow, who was the founder of the Wall Street Journal and co-founder of Dow Jones & Company, Dow theory offers a framework for understanding the movements in the stock market and making investment decisions.
The Dow theory is based on six key principles. The first principle states that the stock market reflects all available information, meaning that the prices of stocks incorporate all relevant news and factors. The second principle asserts that the market moves in trends, consisting of primary, secondary, and minor movements. According to the third principle, the market's primary trend is defined by three phases: accumulation, public participation, and distribution. The fourth principle suggests that stock market averages have to confirm each other. The fifth principle highlights the importance of volume in confirming trends, as high or increasing volume during upward trends often indicates strong market conviction. Lastly, the sixth principle emphasizes that trends persist until concrete signals indicate their reversal.
By analyzing the market using the Dow theory, investors and traders can gain insights into the current trend, its potential longevity, and potential points of reversal. It helps traders make informed decisions on buying or selling stocks, and also aids in identifying overall market conditions such as bull markets, bear markets, or market reversals.
Overall, Dow theory serves as a foundational concept in technical analysis, providing a framework for understanding the behavior and trends of the stock market and assisting investors and traders in making well-informed decisions.
Common Misspellings for DOW THEORY
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Etymology of DOW THEORY
The word "Dow theory" is derived from the name of one of its creators, Charles Dow. Charles Dow was an American journalist and the founder of the Dow Jones & Company, which is now known for publishing the Wall Street Journal. He developed a theory about stock market behavior and market trends, which later came to be known as the "Dow theory" in his honor. Dow's ideas and principles laid the foundation for technical analysis in financial markets.
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