People who invest in the stock market know all about the Dow Theory. This is what helps determine stock price. The sustainability of a publicly traded company and its futures depends heavily on what the theory determines for it. The theory is named after Charles H. Dow who was a journalist. He founded the Wall Street Journal and served as its first editor. During his time as editor of the Wall Street Journal, he wrote several editorials that served as the basis for the theory. Contrary to what some might believe, he never used the terminology himself nor did he think of the editorials as a theory of any kind. Instead, it was after his death that three other men collected the editorials and used them to base the theory on.

There are six aspects of the Dow Theory:

The market has three movements – The first movement may last only less than a year, but then again it could last several years. The second movement is called the medium swing and lasts generally from 10 days to a few months. The third movement is called the short swing. It can vary by the hour, day or even by the month. All three movements can be going on at the same time.
There are three phases to market trends – There is an accumulation phase, which is when investors who are considered to be in the know are buying and selling stock that goes against what the market determines. This phase generally has no change in stock price. The next phase is the public participation phase. This is when the public gets wind of what is going on and begins to buy and sell the same stocks. This causes the price to change significantly. The third phase is the distribution phase. This is when the initial investors sell their stocks back to the market.
The stock market discounts news – Stock prices change on a regular basis because of new news that is made available.
Stock market averages confirm one another – Profits and production/shipping values should be going in the same direction. If they are not, then that means there is change coming to that company and it is not safe to invest.
Market trends are confirmed by volume – In the Dow Theory, it is believed that market trends depend on volume. If price movements come right along with high volume, this is believed to be the actual market value.
Market trends will exist until there are definite signals that they have ended – Just because a trend may move in an opposite direction for a short period of time, the Dow Theory suggests that it will eventually go back to its initial path. Of course, it is not easy to determine what a temporary trend is and what a permanent trend is.

On March 14, 2012 By Richard Wilson

Practice Test

The Dow Theory – The Six Tenets of the Dow Theory

A theory regarding the movement of stock prices, the Dow Theory is a form of technical stock analysis that is still used today. It is composed from the analysis of 255 editorials appearing in the Wall Street Journal, written by Charles H. Dow, a preeminent economist and founder of the Dow Jones and Company. There are six main tenets that make up this theory, which are worth taking a look at by anyone who wants to understand the stock market. The first is that the market has three movements, including the main movement, medium swing, and short swing movements. These relate to the amount of time that the market spends in each pattern or trend.

The second tenet of the Dow Theory is that all market trends have three phases. This includes the accumulation phase, public participation phase, and distribution phase. The first phase is when professional investors actively buy and sell a stock. This will not greatly impact the price of the stock, because these investors are in the minority. However, as the knowledge of these beginning movements catches on, the public will start to participate and buy the same stocks, entering the second phase. This causes a rapid price change. Finally, the first round of investors distributes their initial holdings, making the largest profit.

Another component, or third tenet, of the Dow Theory is that the stock prices will incorporate any new information as soon as it is public knowledge, meaning that the news affects prices of stocks. The fourth tenet states that stock market averages must be able to confirm one another, meaning that if one stock rises, it is not a trend until other stocks in the same industry start to follow suit. The averages should, as part of the theory, move in the same direction.

The trends that have been suspected are then confirmed, in the fifth tenet of the Dow Theory, by volume. If prices start to move on a low volume, this could be due to one buyer or seller making certain judgments. However, if the changes in price are also accompanied by a high volume of movement, then this means there is a definite trend. Finally, this theory states that once trends have been identified, you must assume that they exist until there are definitive signals to prove that the trend has ended. By understanding these six tenets, you can gain a greater perspective on the stock market and its trends.

On March 13, 2012 By Richard Wilson

Practice Test

Dow Theory – The Main Tenants

Essentially, Dow Theory is nothing more than a method of technical analysis applied to stock price movement. It’s often used as a study of stock trends, and has a long history of being used to help determine when the right time to buy or sell stocks is. It’s not used as much as it once was, but Dow Theory is still well worth understand since it can help you learn how market trends affect your portfolio and your trades. There are a few basic tenets on which this theory is built, and understanding them is really the key to understanding the entire process.

Dow Theory watches three basic types of movements in the market. These include movements that focus on short, medium, and long term movements. These movements can happen simultaneously or separately, but are the foundation of Dow Theory. Another tenant is that the stock market and its trends will quickly be affected by news – as soon as news related to any stocks is released the price of stocks will change to reflect that news. This is also a basic tenant of efficient market hypothesis, and one that you can’t overlook if you’re investing. Keeping an eye on new developments is vital.

Also, market movements occur in three basic phases according to the Dow Theory. The first phase, known as the accumulation phase, occurs when investors who are ‘in the know’ – those with inside information – are making trades based on their knowledge. The next phase is known as the public participation phase. This is when other general traders notice the movements being made by the inside investors, and when this occurs the market prices will shift quickly to reflect the new trend. At this point the third phase, known as the distribution phase, will occur. This is when those original investors begin to distribute their shares among the public market, often for serious profits.

The final tenants of Dow Theory include additional info on the overall trends in the market. First, market averages have to confirm one another. The central rules behind this tenant applied mainly to the 20s, when Dow Theory was introduced. Additionally, according to this theory trends are usually confirmed by volume, and they exist until various signals prove that they’ve reached their end. While many people consider this theory archaic and outdated, some of the basic principles are still very much valid in today’s economy. Take a closer look at Dow and you may find some tips for investing.

Login / Register

The Dow Theory – What Does the Dow Truly Mean?

The Dow Theory – The Six Tenets of the Dow Theory

Dow Theory – The Main Tenants

Contact

Certifications

Company

Login / Register

Contact

Certifications

Company

Save your cart?