Dow Theory
Dow Theory is a financial theory developed by Charles Dow in the late 19th century, used to explain and predict price movements in the stock market. The core idea of Dow Theory is that market prices reflect all available information, and price movements can be categorized into three types: primary trends, secondary trends, and daily fluctuations. Primary trends refer to long-term price movements, secondary trends are medium-term price corrections, and daily fluctuations are short-term price movements. Dow Theory also emphasizes three phases of the market: the accumulation phase, the markup phase, and the distribution phase. By analyzing these trends and phases, investors can make more informed investment decisions.
Dow Theory
Definition
Dow Theory, proposed by Charles H. Dow in the late 19th century, is a technical analysis theory used to explain and predict stock market price movements. The core idea of Dow Theory is that market prices reflect all available information, and price changes can be categorized into primary trends, secondary trends, and daily fluctuations. Primary trends refer to long-term price movements, secondary trends are medium-term price adjustments, and daily fluctuations are short-term price movements. Dow Theory also emphasizes three market phases: accumulation, uptrend, and distribution. By analyzing these trends and phases, investors can make more informed investment decisions.
Origin
Dow Theory was proposed by Charles H. Dow in the late 19th century. Charles Dow was one of the founders of The Wall Street Journal and the creator of the Dow Jones Industrial Average. He developed this theory through long-term observation and analysis of market data. The foundation of Dow Theory is a series of editorials published by Dow in The Wall Street Journal, which were later compiled into a book, forming the core content of Dow Theory.
Categories and Characteristics
Dow Theory is mainly divided into the following trends and phases:
- Primary Trends: These are long-term price movements, usually lasting a year or more. Primary trends can be bull markets (sustained price increases) or bear markets (sustained price decreases).
- Secondary Trends: These are medium-term price adjustments, usually lasting from a few weeks to a few months. Secondary trends are corrections to the primary trend and may be counter-movements.
- Daily Fluctuations: These are short-term price movements, usually lasting from a few days to a few weeks. Daily fluctuations are often influenced by market sentiment and short-term events.
Dow Theory also emphasizes three market phases:
- Accumulation Phase: This is the phase where the market bottom forms, typically initiated by informed investors buying stocks.
- Uptrend Phase: This is the phase where prices start to rise significantly, attracting more investors into the market.
- Distribution Phase: This is the phase where the market top forms, with informed investors starting to sell stocks.
Specific Cases
Case 1: After the 2008 financial crisis, the U.S. stock market experienced a clear accumulation phase. Informed investors bought stocks at market lows, followed by an uptrend phase where prices continuously rose until reaching a new high in 2018.
Case 2: In 2015, the Chinese stock market experienced a significant uptrend phase, followed by a distribution phase in 2016, where market prices plummeted, and many investors sold stocks at the peak.
Common Questions
Question 1: Is Dow Theory applicable to all markets?
Answer: Dow Theory is primarily used for stock markets, but its basic principles can also be applied to other financial markets, such as forex and commodities.
Question 2: Can Dow Theory accurately predict market trends?
Answer: Dow Theory is an analytical tool and does not guarantee accurate market trend predictions. Investors should use it in conjunction with other analysis methods and market information for decision-making.
