Matthew Chandler 22 / March / 22

Dow Theory in Technical Analysis

Dow theory: analysis and definition

Dow Theory is a set of principles that help determine the movement and direction of the market.

Do you want to trade the market but don't know how to get started? Can't figure out the trends? Then read on, we will help.

In this article we will try to answer your questions and tell you:

Let's start!

Dow Theory - Who Was Charles Dow?

Charles Dow was the son of a farmer and was born in Stirling in 1851. His father died when Charles was only 6 years old, so the boy had to leave school and start working to support his family.

Later, Charles Dow began his career as a journalist, and in 1889 he founded the Dow Jones Company. This company was the first to publish an index designed to reflect the movement of the stock market. This index eventually became known as the Dow Jones.

What is Dow Theory?

Dow theory is based on the analysis of the highs and lows of market swings, which can be used to predict the direction of the market.

According to Dow Theory, the importance of these highs and lows lies in their position relative to previous highs and lows.

This methodology allows you to understand the trading chart and better understand what is happening with the asset.

This simple analysis will help even beginners to figure out in which area a financial instrument is developing.

Another important point! Charles Dow supported the general consensus that the price of an asset and the resulting fluctuations on a trading chart contain all the necessary information, both currently available and expected in the future.

Dow Theory: Basic Principles

The Dow Theory is based on 6 principles:

This means that any event that affects supply and demand is reflected on the trading chart in the price of the corresponding asset.

According to Dow theory, the market moves in three types of trends:

The following principles:

Dow Theory tells us that the existing trend must be confirmed by these two indices (they must follow the same trend). If not, it could be a sign of a weakening or trend reversal.

 Validity of the current trend until the change is shown.

Dow Theories in Technical Analysis

After examining the 6 principles on which the Dow theory is based, it can be seen that the main principle of the Dow theory in technical analysis is to use the high and low points of the market to determine the market situation, therefore:

What happens otherwise?

Financial markets can only exist in two states:

With this approach, a market that is no longer trend-following develops to consolidate until the next momentum, resulting in a trend reversal.

Dow Theory: Support and Resistance

What are the advantages of this method?

Everything is very simple and logical:

  1. It allows you to explore every scenario
  2. It predicts the market trend
  3. It indicates market entry points

What are the disadvantages?

Dow Theory: Cascade Lows

What are the advantages of this method?

Dow Theory: Cascade Highs

The case is the same, but in reverse order.

Dow Theory in Technical Analysis: Benefits
And still:

Yes, many private and professional traders use the Dow Theory because it doesn't fail.

Main reasons:

  1. This is the fastest available indicator for Forex trend confirmation.
  2. Unlike most indicators, there is no delay in this analysis because it is based on price, the most direct information possible.
  3. Dow Theory is applicable to any market and is based on human behavior.
  4. This concept is easy to understand, it's a simple yet effective approach.

As you can see, this method of Dow analysis is very effective during a trend and is therefore completely suitable for all traders.

Dow Theory: Conclusion

Did you find a suitable technical analysis method in this article?

If so, be sure to let us know!

Financial markets are constantly changing. However, the basic principles of how trends and consolidation periods work have not changed since Charles Dow first revolutionized technical analysis.

A good trading strategy can be chosen based on various theories, and the Dow theory is really very good!

For your peace of mind, we have compiled a complete list of unscrupulous brokers.


Matthew Chandler
Matthew Chandler
Matthew Chandler 33 years old Born in Edinburgh. Married with one child. Graduate University of Cambridge, Psychology course 2011. Works at Acclaim Studios London.

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