Updated on March 15, 2023
The Dow Theory is a method for market analysis and is named after Mr. Charles Dow who was the co-founder of Dow Jones & Company and the Wall Street Journal. The Dow Theory is one of the earliest and most influential approaches to technical analysis and is still widely popular and used in today’s dynamic market.
How to understand Dow Theory?
The Dow Theory is based on the idea that the stock market has three trends namely the primary, secondary, and minor.
The primary trend is the overall direction of the market and can last for several years.
The secondary trend is a counter-movement trend within the primary trend and can last from several weeks to several months.
The minor trend is the daily or weekly fluctuations in the market and is of little significance in the long term.
According to the Dow Theory, traders can determine the primary trend by analysing the behavior of the Dow Jones Industrial Average and the Dow Jones Transportation Average. The theory further states that both indices should confirm each other’s trends. If the Industrial Average is making new highs but the Transportation Average is not it is a bearish sign, and vice versa.