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Dow Theory: the foundation of technical analysis

Charles Dow's six tenets: three kinds of trend, three phases, volume confirmation and trends lasting until a clear reversal.

Charles Dow

Charles Dow, co-founder of Dow Jones & Company and The Wall Street Journal, wrote editorials in the late 19th century. Organised by his successors, those ideas became Dow Theory.

The six tenets

  1. The market discounts everything.
  2. There are three trends: primary (months to years), secondary (weeks to months, correcting the primary), minor (days).
  3. Primary trends have three phases: accumulation, public participation, distribution (excess).
  4. The averages must confirm each other.
  5. Volume must confirm the trend.
  6. A trend persists until it gives a definite reversal signal.

Applying it today

  • An uptrend is a series of higher highs (HH) and higher lows (HL). It ends only when price makes a lower high and then breaks the last low.
  • Trade with the primary trend and use secondary moves (pullbacks) to find entries.
  • Compare related indices: the S&P 500 at a new high while the Nasdaq fails to follow is a reason for caution.
TipMost modern approaches (SMC, Wyckoff, price action) build on Dow's HH/HL idea.

Try it on a chart

Educational content only, not investment advice. Practise on a demo account before using real money.