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Understanding 6 Tenets of Dow Theory

elearnmarkets | 14 Nov, 2017  | Follow Author | Add to my Favourites 
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Dow Theory is a trading approach developed by Charles Dow who is also known as the father of Technical Analysis. It is still the basis of technical analysis of financial markets. The basic idea of Dow Theory is that market price action reflects all available information and the market price movement is comprised of three main trends.

Most of modern day technical analysis theory has an origin from ideas proposed by Dow and his partner Edward Jones back in the 19th century. Those ideas were published in the Wall Street Journal and are still assimilated by most of the technicians. Dow Theory still dominates the far more sophisticated and equipped modern study of technical analysis.

The 6 tenets of Dow Theory’ are discussed below:

1. Market moves in summation of three trends

(1) The PRIMARY TREND- It can be as long as years and is the ‘main movement’ of the market. (2) The INTERMEDIATE TREND- lasting between 3 weeks to several months, retraces the last primary move some 33-66% and is difficult to decipher. (3)The MINOR TREND- is least reliable, lasting from several days to few hours, constitutes of noise in market and may be subject to manipulation.

2. Market trends have three phases

Be it the bull trend or the bear trend, either ways there are three well defined phases for each. For uptrend, the phases are Revival of confidence (accumulation), Response (public participation),Over-confidence (Speculation) .The three defined stages of the Primary Bear Trend are Abandonment of hope (Distribution), Selling on decreased earnings (doubting), Panic ( distressed selling )

3. All news is discounted in the stock market

Prices know it all. All possible information and expectations are factored into prices beforehand. You may do NSE Academy Certified Technical analysis course to learn Technical Analysis in detail and also about various trading strategies.

4. Averages must confirm

Initially, when the US was a growing industrial power, Dow had formulated the two averages. One would reflect the state of manufacturing and the other, the movement of those products in the economy. The logic was that if there is production, then those who move them about should also be benefiting and hence new peaks in the industrial average needed to be confirmed by the peaks in the transportation average. Today, the roles have changes, but the relations remain among sectors and so does the necessity of confirmation.

5. Volumes confirm trends

Dow was of the belief that trends in prices could be confirmed by volumes. When the movements in price were accompanied by high volumes, they would depict the ‘true’ movement of the prices.

6. Trends continue, unless definitive reversals come about

Irrespective of the day to day erratic movement and market noise that maybe witnessed in prices, Dow believed that prices moved in trends. Reversals in trends are hard to predict unless it’s too late due to the nature and difference in magnitude of trends. However, a trend is believed to be in action unless definitive proofs of reversal emerge.


By understanding the Dow Theory, traders are better able to spot hidden trends that more experienced investors may be noticing. This allows them to make more informed decisions regarding their open positions.




Elearnmarkets wants to inform you that this post/video is solely for educational purpose. We are not advising any trading or investment ideas. We want to add that the data/indicator/signals contained in this website/post/video are not necessarily real-time nor accurate. All CFDs/traded instruments (stocks, indexes, futures, commodities) and Forex prices are not provided by exchanges but rather by web based charting platforms, and so prices/indicators may not be accurate and may differ from the actual market prices, meaning prices are indicative and not appropriate for trading or investing purposes. Therefore, Elearnmarkets doesn`t bear any responsibility for any trading losses you might incur as a result of using this data/ indicators/charting platform. This analysis is purely based on the technical observations and not meant for investing with real money. Elearnmarkets does not have any position in the market. One can create position in market at his/her own risk.


Elearnmarkets or anyone involved with Elearnmarkets will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals/discussions contained within this website/post. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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