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Dow Theory

dow theory

The Dow Theory has existed for nearly 100 years; however it has still shown to be a valuable form of technical analysis in todays advanced technological market and even in the face of this century’s greatest economic crisis. The basic facets of Dow Theory continue to remain useful and applicable to variety of situations and outcomes.

 

Dow Theory was developed by Charles Dow who introduced his theories to the world via the Wall Street Journal. Following his death in 1902, his theories were polished by William Hamilton and were put on paper by Robert Rhea. Dow Theory does not only focus on technical analysis and price actions; it also addresses market philosophy which was ground breaking, at the time as many analysts and economists were not able to incorporate the three into a comprised and efficient theory.

 

Before using Dow Theory a trader or analyst must accept a few major assumptions or beliefs. If any of these assumptions are difficult to understand we here at Infin Markets and more than happy to accommodate any questions or queries, in order to increase our valued customers knowledge and expertise.

 

Assumptions

  1. Three major movements of a market

    • “Main Movement” – a major trend in the market that may last for less than 12 months to several months.
    • “Medium Swing” – a mid-point swing in the market which may be experienced for usually 10 days to 3 months.
    • “Short swing” – a very small movement in the market that may be viewed within a day or up to a month.

  2. The Three phases of market trends

    • Phase 1 – This occurs, when investors with valuable information or knowledge begin buying or selling financial instruments, contrary to the market trend.
    • Phase 2 – The market begins to shift in the direction of the investors.
    • Phase 3 – This is when the major investors start to unload their securities to willing market participants.

  3. All news are discounted by the stock market

This means that the market in which a certain financial instrument is traded, reflects all the information with regards to that security, in terms of price. In other words the price of the security shows a true indication of all the news, sentiment and expectations relating that specific instrument.

 

For the conclusion, Dow Theory was conceptualized as method for identifying the major trend and as a means for trying to catch a big move. However, it has been observed that Dow Theory helps investors in identifying facts in the market and should not be used directly as a means to make assumptions or forecasts. If you require any further information about Dow Theory or any other aspect of Forex market analysis please feel free to contact us.

 

Furthermore, if you would like to put Dow Theory to the test, please, feel free to open a Demo account with Infin Markets, before trading on a real account. You can do this by using our proprietary NetTradeX platform or the widely recognized MT4. No matter which platform you decide to use, you will definitely be one step ahead of the competition.

 

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