Dow theory
According to forex trading and analysis, Dow theory is the oldest one and it is about how to build wealth given the nature of movements of the US stock market.
Dow (1851-1902) was a journalist, first editor of the Wall Street Journal and co-founder of Dow Jones and Company. Dow himself never used the term “Dow Theory“, it was refined after his death by William P. Hamilton, Charles Rhea and E. George Schaefer. During the whole movement there can be expected to be predecessor) and declining bottoms (each lower than its predecessor) with the whole bear movement depicted as usually consisting of a few intermediate (medium-term) declines and rallies. Dow Theory asserts that bull markets are characterised by a primary trend that consists of three major upward thrusts (of the major indices) interrupted by two pull-backs i.e. periods of weakness.
The Dow Theory has been used and still using by millions of successful traders and investors for over a century because its principles continue to work remarkably successfully. Also it is the very foundation of stock market investing know-how.
The Dow Theory is the very foundation of stock market investing know-how. It has been used by millions of successful investors and traders for over a century because its principles continue to work remarkably successfully.
Postulates of the theory:
1. There are three phases to both a primary bull market and a primary bear market (not to be confused with the three movements mentioned above). The first movement upwards - result of accumulation of shares the most acute traders during decline of economy at presence of positive forecasts. The second movement of the prices upwards is formed, when traders start to buy up ctions{shares}, learning{finding out} about increase of incomes of the company. And last wave of growth - result of purchases of shares wide layers of the population as consequence of a stream of favorable financial news. Usually at last stage of growth in the market speculators prevail.
2. The primary trend is considered valid until the signal about its change will not be sent by both indexes.
3. The prices of closing of indexes are taken into account only. Price movements within day are not considered.
4. Movement of one of indexes should prove to be true movement of another. A signal about the beginning of the “bull” trend is rise of both indexes above maxima of their previous secondary growing reactions to the “bear” trend. A signal about the beginning of the “bear” trend is falling both industrial, and transport Dow - Johnes indexes up to a level is lower than minima of their previous secondary reactions to the “bull” trend. Movement to a new maximum or a minimum of one of indexes is not significant. We shall notice, however, that one of indexes quite often before another gives a signal about change of a trend.
5. All essential information on the market contains in the average prices (indexes), first of all in Dow - Johnes industrial and transport indexes.
6. The primary falling trends known also under the name of the “bear” markets, will usually consist of three movements downwards. The first movement of shares downwards is caused by sales of the most acute traders which understand, that cost of shares is excessively high, and rates of growth of profits of the company cannot be kept for a long time at the given level. The second movement of the prices downwards - result of the panic arising when the sellers scared by absence of buyers, aspire to leave as soon as possible from the market. Last movement of the prices downwards is caused by a catastrophic wave of sales in connection with necessity for money resources.
7. The market is always to be considered as having three movements, all going on at the same time. The long-term trend of the prices of shares refers to as a primary trend. However any trend is not capable to move long time in the chosen direction, therefore on change primary there comes the secondary trend opposite to it representing correction first, longer. And at last, small trends are the daily fluctuations of the price influencing only on activity of traders, working on small time horizons, and indifferent Dows for the theory.
There were some associates of the Dow theory:
1. E. George Schaefer
In July 1949, with the Dow Jones Industrials registering a low at 161.60 and with the country in the midst of a severe recession, a new primary bull market was born. E. George Schaefer, a Dow Theory disciple for more than 20 years, started his newsletter writing career near that time, calling his subscribers to load up on common stocks in June 1949. He remained steadfastly bullish in the great corrections of 1953 and 1957 and cautiously bullish since 1960 until the final top in 1966.
Schaefer believed that Hamilton strayed away from Dow’s original principle of investing in “values” and that Rhea spent most of his life improvising Hamilton’s “system” of trying to trade the markets when 95% of the population just cannot duplicate what the emotional-less professional traders can do. He also emphasized that some of the “rules” that Hamilton and Rhea developed did not apply to the more modern and more emotional markets of today (such as the claim that secondary reactions tend to retrace one-third to two-thirds of the preceding primary swings). The best course of action was to buy “great values” and staying fully invested through the primary trend.
2. The next great Dow theorist, Robert Rhea, initially stumbled upon the Dow Theory during his endeavor to find “a system” for helping him make money in the stock market. In his attempts to disprove the theory, he became a convert. Rhea was a very serious student, and he was able to utilize the Dow Theory as interpreted by Hamilton to his advantage, buying and holding stocks in 1921, and basically holding them until late 1928 (he reversed his short position when he realized Hamilton’s advice was incorrect in early 1926), missing only the final blowoff phase. He also “played” the short side successfully during the subsequent deflation. In 1932, he began publishing his newsletter based on the Dow Theory, called the “Dow Theory Comment.”
3. Richard Russell
Richard Russell was another Dow Theorist who stumbled upon the Dow Theory during a quest to find useful literature regarding the stock market. He became a convert after reading the writings of Robert Rhea. Russell decided to follow in the footsteps of Rhea and Schaefer - establishing his newsletter “Dow Theory Letters” in 1958, partly inspired by the extreme bearishness of the public during the great correction of late 1957 (Russell was bullish at the time).
He also urged subscribers to sell at the top in February 1966, and he rightly turned bullish in December 1974. Following are excerpts from his newsletter during those periods.
4. William P. Hamilton, Dow’s understudy and the fourth editor of the Wall Street Journal, continued Dow’s legacy after his death in 1903. The Dow Theory as interpreted by Hamilton forms the basis of all modern technical analysis today. He wrote about the Dow Theory for the Wall Street Journal for more than 20 years. His additions to the Theory included:
* Determining the trend by spotting “higher highs” or “lower lows”.
* The Averages discount everything.
* The Theory is not infallible. If someone did find such a system, then he or she will own the world in relatively short order and speculation as we know it will not exist.
* The primary trend cannot be manipulated.
* Both the Industrials and Rails (the modern day Transports) must confirm each other in order for the signal to have authority.
It is one of the best and most popular methods of definition of the main trend of the Forex market. Dow Jones theory - really a corner stone of the Forex trading analysis.