Terms

Dow Theory

Dow Theory

The Dow Jones Theory is a trading approach developed by Charles Dow that explains how the stock market can be used by investors to understand the health of the business environment. The first theory to explain that the market moves in trends, it has been the basis of technical analysis of financial markets, based on the analysis of maximum and minimum market fluctuations to make accurate predictions on the direction of the market. It involves the relationship between the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA), explaining the basic idea that market price action reflects all available information and the market price movement is composed of three main trends. The Dow Theory is predicated on the notion that the market discounts everything in a way consistent with the efficient markets hypothesis.

  • You have companies that make goods and companies move sell them
  • If all is well, both groups of companies should be doing good
  • If one of the groups is doing bad, it's a sign that something is wrong