{"id":12968,"date":"2022-08-19T20:42:26","date_gmt":"2022-08-19T17:42:26","guid":{"rendered":"https:\/\/roboforex.com\/blog\/?p=12968"},"modified":"2023-10-11T11:16:54","modified_gmt":"2023-10-11T08:16:54","slug":"how-to-use-dow-theory-in-technical-analysis","status":"publish","type":"post","link":"https:\/\/roboforex.com\/blog\/2022\/08\/19\/how-to-use-dow-theory-in-technical-analysis\/","title":{"rendered":"How to Use Dow Theory in Technical Analysis"},"content":{"rendered":"\n

There is an opinion that modern tech analysis<\/a> is based on the Dow theory, and today we will speak about this unique Charles Dow’s theory that still remains quite efficient. Also, we will discuss how this approach can be used in trading.<\/p>\n\n\n\n

<\/span><\/a>What is Dow theory<\/span><\/h2>\n\n\n\n

A series of Dow’s articles in the Wall Street Journal helped William P. Hamilton, Robert Rhea, and George Schaefer design a market research theory.<\/p>\n\n\n\n

The Dow theory is an approach to trading based on six principles. The main focus is on price highs and lows that help detect the current trend. Also, each outer factor, such as news or random events, is supposed to be already incorporated in the price. The Dow theory in technical analysis remains topical these days as well.<\/p>\n\n\n\n

Initially, the principles were used for the railway and industrial indices<\/a> only that were included in the Dow Jones Industrial Average. However, some research proves the efficacy of the principles for the stock market as well.<\/p>\n\n\n\n

For example, Martin Pring in his book Technical Analysis Explained wrote that the stocks<\/a> from the Dow Jones index bought in 1987 for 44 USD could have yielded about 2,500 USD of profit if sold in 1990.<\/p>\n\n\n\n

<\/span><\/a>Charles Dow theory principles<\/span><\/h2>\n\n\n\n

As said above, the whole of the Dow theory is based on six principles. Let us take a look at each of them in a more detail.<\/p>\n\n\n\n

<\/span><\/a>Market cares for everything<\/span><\/h3>\n\n\n\n

All events and factors have already been taken account of by the market and included in the price. Absolutely any event that might happen, even a disaster or an earthquake, is valid. The principle is also known as “Market depreciates everything”.<\/p>\n\n\n\n

For example, if a company is getting ready to present a great report, the market is likely to account for it even before the report appears. In other words, the demand for the shares of the company will grow in advance, and after the report is published, the growth might stop.
Moreover, the quotes might fall when a strong report is published because the report might turn not as great as expected.<\/p>\n\n\n\n

<\/span><\/a>There are three types of trend<\/span><\/h3>\n\n\n\n

Charles Dow defined the trend but never made a focus on uptrends, downtrends, and flats<\/a> as in classical tech analysis<\/a>. Nonetheless, his definition of the trend remains efficient. It says that in an uptrend, each next high and low is higher than the previous one. In this principle of the Dow theory the length of trends is estimated:<\/p>\n\n\n\n