Dow Theory: A Comprehensive Guide for Stock Traders

Dow theory is an integral part of stock trading in the market today. The theory was created by Charles Dow around 1900. Here are the basics of Dow theory and how investors use it in the market.

Market Discounts Everything

One of the most basic principles in Dow theory says that the market discounts everything. This means that everything is factored into the current market price of a stock. This includes company earnings, investors feelings, and interest rate information. Therefore, this theory provides support for those that believe in technical analysis of the markets.

Trends

Dow theory also put an emphasis on analyzing trends in the stock market. Dow believed that you could analyze trends, and therefore take advantage of these trends when trading stocks. If you could identify the primary trend, you could know which direction to place a trade, and ride it to profits.

Market Indexes

Dow also believed strongly in the power of market indexes. In fact, he created the Dow Jones industrial index in order to track the movements of the market as a whole. He also believe that the market indexes had to confirm with one another before a major trend reversal could be indicated. Therefore, he believed that investors needed to pay special attention to market indexes.