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The Dow Theory is said to be the cornerstone of technical analysis in the stock market. It was written by Charles Dow, who later founded the famous American newspaper ‘The Wall Street Journal’ with his two companions.

If you are planning to invest money in the stock market and do not understand how the market works. What are the factors with the help of which it can be easily ascertained that in which direction the market will go and what will be the condition of the market in the coming time. The Dow Theory, made a century ago today, can help you a lot.

The Dow Theory is said to be the cornerstone of technical analysis in the stock market. It was written by Charles Dow, who later founded the famous American newspaper ‘The Wall Street Journal’ with his two companions.

What does The Dow Theory say?: Dow believes that the stock market is an indicator of the conditions of the economy. By assessing these conditions one can assess the exact direction of the market at large. Also, it has been told in this theory that the behavior of all the investors in the stock market at the same time is the same. For example, when the market starts falling, all the investors get scared and sell in haste. At the same time, when the market starts moving, then investors get ready to buy even at expensive prices. It also tells about support and resistance in theory.

The market discounts everything: The Dow Theory states that the market discounts everything. Whether the company’s incoming income, increasing competition in the market or the incidental income of the company, is already visible in the stock of any company. Similarly, in the stock market, the effect of any major event is already visible in the form of rise or fall in the market.
There are three trends in the market: The market mainly moves on three trends. The first is the primary trend, which lasts for a few years in the market. The second is the secondary trend, which can last up to three weeks and months in the market. The third is the final trend, which can last as little as three weeks and sometimes a few hours.
The stock market has three phases: The Dow Theory states that there are three phases of the stock market in a bullish market – the accumulation phase, the public participation (where large returns are obtained) phase and the additional phase. At the same time, in a bearish market – there is a distribution phase, a public participation phase and a panic selling phase.
All indices indicate each other’s position: It states that the indices point to each other’s position in the market. For example, if Nifty IT indicates a bullish trend, then traders should also check an index like Nifty 50 at once. If it is still pointing in a flat or bearish direction, then it should not be considered as a change in trend.
Volume confirms the trend: According to the Dow theory, one must see the volume coming in the stock before catching any trend. If the price of a stock is increasing but the volume is not increasing then it means that the trend is weak and can turn in the other direction anytime.
As long as the trend continues, there should be no reversal: Dow believed that it was very difficult to detect a reversal in the middle of a trend. Traders associate it with the secondary face, but unless there is a huge difference between your expectation and the result, it should not be considered a reversal.


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By udaen

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