Dow Theory

DOW THEORY
Sarath c
Sme-2019-21-33
HISTORY
• The Dow Theory was introduced by Charles H.

Dow, who also founded the Dow-Jones
financial news service (Wall Street Journal).
• During his time. he wrote a series of articles
starting from 1900s which in the later years
was referred to as ‘The Dow Theory’.
• He has became one of the most respected
financial publications in the world.
WHAT IS DOW THEORY ?
The Dow theory is a financial theory that says the
market is in an upward trend if one of its averages
( INDUSTRIAL AND TRANSPORTATION )
advances above a previous important high and is
accompanied or followed by a similar advance in
the other average.
This theory explain how does stock Market can be used
by investors to understand the health of a business
environment.
It was the first theory to explain that the market moves
in trend
While a lot has changed in the stock market over the
years, the basic tenants of the theory still remain valid
6 BASIC TENETS
• The markets discount everything

• The markets have three trends
• The market trends have three phases.
• Indices must confirm each other.
• Volume Must Confirm the Trend
• A trend is said to be continuous until a reversal
is confirmed
1. PRICE DISCOUNTS EVERYTHING
• The first basic premise of dow theory that all
information- past, present and even future is
Discounters into the market and the reflected
in the price of a stock and indices
• That information includes everything from the
emotions of investors to inflation and interest-
rate data along with pending earnings
announcements to be made by companies
after the close.
2.THE MARKET HAVE 3 TRENDS
Dow introduced that the market trends

can be classified into three trends.
a. Primary trend
b. Secondary trend
c. Minor trend
Looking at above chart,
• Nifty is in primary uptrend and secondary trend is counter against the
primary trend indicated by red arrow.
•At the same time minor trend is shown with blue arrows, which is usually
called as noise too.
•Charles Dow defined an uptrend as one which has a consistent rising
peaks and troughs while a downtrend is determined by falling or lower
peaks and troughs.
•Each of the three trends is also determined by their timeline. The primary
trend usually lasts for more than year, while a secondary trend can be
from a few weeks to a few months
• finally the minor trend lasts for a few weeks, which are largely
noise.These are daily fluctuations in the market.
Between the three trends, Dow notes that it is important to know what the
primary trend is as it tends to impact the secondary and minor trends.
2. THREE TIME FRAMES
• To do this the theory uses a Trend analysis ,

• an important part of the dow theory is
distingushing the overall direction of the
market
• Before we can get into specifics of dow theory
trend analysis, we need to understand trends.
• The first its important to note that while the
market tends to move in general direction or
trend it doesn't do so in a straight line
• The market will Rally up to high and then sell off
to a low but will generally move in One Direction.
• Dow theory identifies three trends within the
market – primary, secondary and minor
• A primary trend is the largest trend lasting for
more than a year .while the second trend is
intermediate trend last 3 weeks to 3 months and
is often associated with a moment against the
primary trend.
• Finally minor trend often lasts less than 3 weeks
and it is associated with the moments in the
intermediate trend.
3.THE MARKET TREND HAVE 3 PHASES
• Dow Theory suggests the markets are made up of
three distinct phases, which are self repeating.
• 1. Phase1 - Accumulation
2. Phase 2 – Markup phase
3. Phase 3 – distribution phase
4.Indices must confirm each other
• A trend in the market cannot be verified by a
single index.
• All indices should reflect the same opinion. For
example, in case of a bullish trend in India, the
Nifty, Sensex, Nifty Midcap, Nifty Smallcap and
other indices should move in the upward
direction. Similarly, for a bearish trend, all
indices should move in a downward direction.
•
5. Volume Must Confirm the Trend
• The volumes must confirm along with price. The
trend should be supported by volume. In an
uptrend the volume must increase as the price
rises and should reduce as the price falls.
• The reason for this is that the uptrend shows
strength when volume increases because
traders are more willing to buy a stock in the
belief that the upward momentum will
continue
• on the other side, in a downtrend, volume
must increase when the price falls and
decrease when the price rises
6. A trend is said to be continuous until a
reversal is confirmed
• According to this principle, Dow states that
trend is actually one continuous movement and
that unless there is some external force acted
upon, the trend will not change.
• If the market is rising, it will more likely
continue to rise. If the market is falling, it will
more likely continue to fall.
• If the market is not going anywhere, it will more
likely continue to stay within a range.
Thank you

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DOW THEORY

• The Dow Theory was introduced by Charles H.

• The markets discount everything

Dow introduced that the market trends

• To do this the theory uses a Trend analysis ,

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