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Dow Theory

The Dow Theory is pure technical analysis. Charles Dow, the first editor of the Wall Street Journal, developed it in the 1890ís. The theory became formalized after his death in 1902. Mr. Dow used the theory to gauge the general business conditions and trends of his day. Investors who still follow his theory buy when the market goes higher then its last peak and sell when the market sinks below its preceding valley.  

The theory tries to identify if the market is on an upward or downward trend, using the averages that he developed: the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA). He identifies three movements in stocks. The primary trend, which is the long-term trend, may last several years to a decade. The secondary trend identifies market corrections within the primary trend. There may be two or three secondary trends in each primary bull or bear market. Last, the daily fluctuations of stock prices. The Dow Theory views daily price swings as unimportant to the direction of a primary trend. The theory identifies which way the market is moving, but only after the fact. Itís not used as a tool to predict future prices or trends. While not 100% accurate, it does give the investors some sense of the direction of the market, which is always valuable information.

 

 

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