INSIGHTSDow Theory, developed by Charles H. Dow in the early 20th century, forms the foundation of modern technical analysis. It posits that market prices reflect all available information and can be deciphered through price trends. The theory is based on three main tenets: the market discounts everything, there are three market trends (primary, secondary, and minor), and that indices must confirm each other to validate trends.
For instance, a bullish trend is indicated when both the Dow Jones Industrial Average and the Dow Jones Transportation Average rise concurrently. If one index achieves a new high while the other does not, it could suggest a potential trend reversal. Traders often utilize Dow Theory to establish entry and exit points based on these confirmations, focusing on chart patterns and volume trends.
Related concepts include trend analysis, support and resistance levels, and the identification of market phases. While Dow Theory primarily focuses on stock indices, its principles can be applied across various financial markets, providing traders with a framework to understand and predict market behavior.