Dow Theory

Dow Theory At a Glance



Dow Theory is based on the philosophy that the market prices reflect every significant factor that affects supply and demand - volume of trade, fluctuations in exchange rates, commodity prices, bank rates, and so on. In other words, the daily closing price reflects the psychology of all players involved in a particular marketplace - or the combined judgment of all market participants.

The goal of the theory is to determine changes in the major trends or movements of the market. Markets tend to move in the direction of a trend once it becomes established, until it demonstrates a reversal. Dow theory is interested in the direction of a trend and doesn't offer any forecasting ability for determining the ultimate duration of a trend.

Much of today's technical analysis is based on Dow's original "trend following' system -

The three trends are:

Each market trend has three parts compared to tides, waves and ripples.


The major trend has three phases:

A Major or Long-term Stock Market Trend:

Shortcomings of the Dow Theory:

Also see trendlines, tops & bottoms, and triangles.