Dow Theory Principles and intro to Charles Dow

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The Dow Theory is a foundational principle of technical analysis in financial markets. It originated from the writings of Charles Dow, co-founder of the Dow Jones & Company, and was later refined by analysts like William Hamilton and Robert Rhea.

Key Principles:

  1. Market Moves in Trends: Prices move in three types of trends—primary (long-term), secondary (medium-term corrections), and minor (short-term fluctuations).
  2. Three Phases of Trends: Primary trends consist of accumulation (informed buying), public participation (wider investor interest), and distribution (selling by early participants).
  3. Market Discounts Everything: Prices reflect all available information, including economic, political, and psychological factors.
  4. Indices Confirm Each Other: Trends are valid when confirmed by movements in both industrial and transportation indices.
  5. Volume Confirms Trends: Higher volumes support the validity of price movements in the trend direction.
  6. Trends Persist Until Reversed: A trend continues despite market noise until clear signals indicate a reversal.

The Dow Theory provides a framework for identifying market direction, aiding in investment decisions. While it has its critics, its principles are still widely respected and applied in modern technical analysis.

Detailed article https://www.investopedia.com/terms/d/dowtheory.asp

About the proposer of the theory:

Charles Dow (1851–1902) was a journalist, economist, and co-founder of Dow Jones & Company and The Wall Street Journal. He is best known for developing the Dow Theory and the Dow Jones Industrial Average (DJIA), one of the first stock market indices and still a critical barometer of the U.S. stock market today.

Career Highlights:

  • Journalism: Dow began his career as a journalist covering financial and economic topics. His writing aimed to make complex financial concepts accessible to the public.
  • Dow Jones & Company: In 1882, Dow co-founded the company with Edward Jones and Charles Bergstresser, focusing on financial news dissemination.
  • The Wall Street Journal: Launched in 1889, it became a leading financial publication, with Dow serving as its first editor.

Dow passed away in 1902, but his contributions remain integral to financial market analysis and journalism.

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