What is the Dow Theory?

Dow Theory Definition. The Dow Theory is a name that was subsequently attached to the various ideas presented in writings by Charles H. Dow in the late1800s regarding movements of stock prices in the market. Many technical analysts consider the Dow Theory’s definition of a trend and its perquisite of studying price dynamics as the early foundation of modern technical analysis. Since others summarized the theory from Dow’s own editorials, the issue of concern is that interpretations are necessary. Dow never laid down specific assumptions. The theory has six tenets: 1) The market has three movements, the main movement, the medium swing, and the short swing; 2) Market trends have three phases, entrance, acceleration, and consolidation; 3) The stock market discounts all news; 4) Stock market averages must confirm each other; 5) Trends are confirmed by volume; and 6) Trends exist until definitive signals prove that they have ended.

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