What is Dow theory?
Dow Theory is an attempt to identify trends in the movement of the stock price. It is a form of technical analysis that emphasizes the price and volume history of shares. The Dow Theory suggests that understanding the effect of events on the market is often more important than understanding the events themselves. It also states that trends in stock prices must be confirmed by high -volume movements in related market sectors.
The principles of Dow Theory came from the writings of American journalist Charles Dow, who lived from 1851 to 1902. Charles Dow founded a world -famous financial publication. Dow Jones & Company has also worked, which offers financial reports and information. Dow tried to understand and analyze market behavior by elaborating a set of principles. Modern understanding of Dow Theory was formulated by scientists who examined Dow's work and writings.
One principle of developed would be that markets can quickly incorporate new messages. Some investors are trying to beat the market usingInformation that has not yet been known to the general public. However, the markets can quickly pick up new information and reflect this information in the stock price. In this sense, the market "distributes" relevant reports simply by changing prices. Investors may not always know the original messages that affect the market; Rather, they need to know what effects the events have on the market.
Dow supporters suggest that trends in one market sector must be confirmed by trends in related sectors. For example, many manufacturing companies rely on transport companies for the possible division of their products. A real ascending trend in production would be correlated with an ascending trend in related traffic sectors.
In the theory of Dow, the anothposhing of the development trend is a high volume in stock. The volume of shares concerns the number of transactions, purchase or sales that take place for specific shares. A high volume of stocks represents effectsThe market is better than the low inventory. This is an analogous competitiveness of the general market. Changes in low -volume stocks could be caused by a number of somewhat arbitrary factors; On the other hand, changes under high volume tend to reflect a more general trend.
Dow Theory also suggests that trends may exist despite significant market noise. The market noise concerns seemingly random movements of stock prices. According to Dow, market prices can temporarily move to monitor the market noise and still show a general trend in a different direction.