Dow Theory

This theory is the foundation of Stock Markets.

It is something all traders should be aware of.

The theory was derived from Wall Street Journal editorials written by Charles H. Dow

It has 6 pillars:-

I. The market has three movements
- Major Trend, Medium Swing, Short Swing

II. Market trends have three phases
- Accumulation phase = Informed and sharp investors start actively buying (or selling, as the
case may be)
- Public Participation phase = Public participation starts, price change accelerates...
- Distribution phase = Rampant speculation starts, sharp investors start distributing the stocks at a killing!

III. The stock market discounts all news.

IV. Stock market averages must confirm each other e.g. increase in housing unit sales should be confirmed by the increase in cement offtake, otherwise the divergence is a warning!

V. Trends are confirmed by volume

VI. Trends exist until proved otherwise.
- Trends exist despite temporary disturbances and breaks. After a while, trends tend to resume.
Don't get trapped on the wrong foot.

Awareness of these postulates can be very confidence boosting in foggy times!