Don't buy or sell without learning these principles! What is Dow theory and why is it important? ...
Hello everyone from the channel screens! We're back with a new video. This week, we're discussing Dow Theory, an integral part of technical analysis.
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Although modern technical analysis has made significant progress over the years, most investors still prefer to use classical methods in their analysis. Dow Theory, one of the first and oldest methods of technical analysis, forms the basis of the methods used today. Therefore, we do not recommend investing or trading without first learning the principles of Dow Theory.
So, what is Dow Theory? Dow Theory is a financial theory that states that if the Dow Jones Industrial Average, a U.S. stock market, rises above a previous significant high, and the Dow Jones Transportation Average follows it within a reasonable period, the market is in an uptrend.
Dow Theory is a trading approach developed by Charles Dow, who developed the Dow Jones Industrial Average in 1896. He believed that the Dow was a reliable measure of the stock market, capable of determining the direction of major market trends and the potential direction of individual stocks. Dow Theory attempts to determine the best timing for entering a trade by analyzing stock market entry and exit points, price trends, volume, and other characteristics.
Dow Theory has six main principles. First, markets experience three types of trends. The most effective movement is the primary trend, which can last from a few months to several years. Long-term investors using Dow Theory try to align their portfolios with the primary trend. Active Traders, on the other hand, focus on all trends. The next type of movement is the secondary trend, which runs counter to the primary trend. A secondary trend can last from 10 days to three months and is typically a correction of one-third to two-thirds of the value gained during the primary trend. You can think of it as a small counter-reaction to a larger market movement. The third type of movement is the short wave, which can last from a few hours to a month. Charles Dow considered this wave to be noise, meaning it was unimportant.