The Dow Theory is one which involves movements in stock prices. This theory originated from the editorials written by Charles H. Dow which were then published in the Wall Street Journal. It functions as a technical analysis and was put together after Dow passed away, specifically by Peter Hamilton, Robert Rhea, and E. George Schaefer.
Dow Theory states that the market is made up of three movements. The first movement, which may also be referred to as the main movement, is one which can either be bullish or bearish. It lasts the longest, and may cover a period of several months to several years. On the other hand, a secondary reaction, also known as a medium swing, may only last for a little over a week to around three months. Lastly, a sort swing may last for only a few hours or may extend to only a little over a month.
Dow Theory also asserts the existence of three phases in market trends. The first phase, which is known as the accumulation phase, is a period during which investors who have access to certain information or have reason to be enthusiastic, trade in stocks even though the market generally seems to disagree. During the public participation phase, more investors participate in the trading of such stocks, therefore affecting market prices. The distribution phase takes place once the sharper investors engage in the distribution of their stocks.
Dow Theory includes other assertions on trends and market prices. Understanding Dow Theory means being able to analyze the effects of events and changes in the market, while placing importance on a stock’s volume history and price.
