6 Basics of The Dow Theory
1. The averages discount everything:
The world’s best and most efficient processor of information is the market itself. If anything happens at all, for whatever reason, man-made or god-made, market will reflect in prices.
2. The market includes three trends:
Up, Down and Sideway. Or Bullish, Bearish and Gyrating
3. The major trends usually have 3 phases:
.The accumulation phase (buying based on early and ‘inside’ information)
.The Public participation phase (when the public catches on to the news)
.The distribution phase (mania, panic buying or selling)
4. The averages must confirm each other:
When Mr. Dow spoke about this, the only two averages were then the railroads and the industrials.
They did not have to start at the same time but both needed to be in the same primary trend. Their actions together confirmed the primary trend.
5. The trend must be confirmed by Volume:
Volume was very very important to Mr.Dow. He strongly believe in it. Primary trend should be confirmed by the increasing volume.
6. A trend will continue until it signals a reversal:
It is a parallel with the Elliot Wave 5. In fact, it is one of the basics formula of the modern-day technical analysis and a very profitable way to trade.
Statistics says that 90% of correct wave 4 will turn to wave 5 and reserve back to the wave 4 low.
Category: Stocks Market
