In the late 90s in «Wall Street Journa» an article entitled "A Century of Charles Dow Index," which talked about the possibility of predicting the future market direction based on the results of previous auctions. This article is a famous person Dow Jones, the creator of the popular theory of Dow and the Dow.
This theory is applied with success and now, in today's technical analysis and it is called the "Dow Theory". This theory is repeatedly refined and tested. And with the introduction of computer technology has become easier to perform and display calculations in the theory on the charts. Often, technical analysts are not even aware that a large portion of them as modern instruments like technical analysis, contains at its core concepts and principles of the theory, laid down the Dow Jones.
This theory is applied with success and now, in today's technical analysis and it is called the "Dow Theory". This theory is repeatedly refined and tested. And with the introduction of computer technology has become easier to perform and display calculations in the theory on the charts. Often, technical analysts are not even aware that a large portion of them as modern instruments like technical analysis, contains at its core concepts and principles of the theory, laid down the Dow Jones.
As for the Dow, it originally included a total of 11 shares of various companies, 9 of them were railroad.
In 1897, the index was divided into two parts: it consists of 20 railway companies and 12 industrial. Already in 1928 the index of industrial companies contained a minimum of 30 shares. Then in 1929 came utilities index. But it all began in 1884 when he appeared, the Dow Jones.
Then, as a sign of deep respect and gratitude to the work of Charles Dow, colleagues from the Association of Technical Analysts, a silver cup presented to us, "Dow Jones & Co." was founded in 1882's, Edward Jones and Charles Dow. Part of the text of the congratulatory letter read as follows: "This award reaffirms the universal recognition of the contribution that Charles Dow introduced into the sphere of investment analysis. Its index is a precursor to accurate barometer of activity in the stock market, it has been and remains the main tool in the work of analysts, technical analysis, despite the fact that since the death of Charles Dow took 80 years. "
Unfortunately, Charles Dow did not have time to write a theoretical study. The only thing that he had it set out some of their ideas in the theory of the behavior of stock market «Wall Street Journal», they were published in the 90s. Then in 1902 Charles Dow died. After his death in 1903, articles have been rewritten in the book "The Alphabet of speculation in the stock market", whose author was S. Nelson. Incidentally, the term "Dow Theory" was first described in detail it in this book. In the introduction, Richard Russell compares the contribution made by Charles Dow, in his theory of the stock market, with the contribution made by Sigmund Freud that the establishment and development of the current mental health.
What's so special about the contribution of Charles Dow? Why is he so valued theory and valued in technical analysis?
The bottom line is that all modern technical analysis based on this theory by Charles Dow and without technical analysis does not make sense. Dow Theory - a kind of forerunner of technical analysis.
And the right approach to the study of technical analysis in the first place, will study at least the main points of his theory.
Thanks to the theory of Dow Jones technical analysis is now the primary criteria of his theory, such as "prices take into account all the information," "typical direction of price movements", "support and resistance", and "divergence and confirmation."
As we have said, initially the idea of the theory of Dow Jones, were presented in the editorials of "Wall Street Journal" and a little later, they published a companion book to the Dow, William Peter Hamilton, who replaced him as chief editor of «Journal». The book was published in 1922, entitled "The barometer of the stock market." Further, the description of the Dow theory, continued in a book called "Dow Theory", whose author was Robert Rea, released in 1932.
Initially, the ideas and principles of the theory outlined in a paper by Charles Dow, were used for the analysis of his own index, rail and industrial. But this is not one of their destiny. The principles of Dow Theory is often used, making a lot of analytical conclusions on the commodity futures market.
Based on this theory, the following points:
In technical analysis, price forecasting is based on the performance of previous trades.
Two of which are extremely important:
- the price of assets. Prices are easy to understand and easy to value of calculation, which makes the price index of a critical part of the analysis.
volume of trades. Based on the theory, meaning that the total number of transactions carried out over a certain period of time, expressed in foreign currency equivalent. These values are, of course it will be harder to find, but possible.
The basic theory of the Dow Jones
The indices take into account everything. This position of the theory states that every factor that may in any way affect the supply or demand, will inevitably be reflected in the index. Often these changes are unpredictable, but nevertheless, they are necessarily taken into account by the market.
The Forex market has three types of trends:
With a clear downward trend each subsequent recession and the peak is lower than the previous one. With a clear upward trend every subsequent recession and higher than the previous peak. In severe horizontal, any subsequent recession and the peak is approximately the same level as the preceding.
Dow Jones, in his theory, also singled out three types of trends: primary (main), secondary (intermediate) and small (short). The most important, is the primary trend, the duration of which can be up to a year or even several years.
Secondary, the trend - it adjusts to the basic trends in duration from 3 weeks to 3 months.
According to Dow theory, the low tendency takes a maximum of three weeks and is short-term fluctuations in the range of intermediate or short-term trends.
The primary trend is divided into three phases:Accumulation phase. Here, the most far-sighted traders take positions on the purchase, because I had all the adverse economic aspects were taken into account by the market.
The onset of Phase 2 occurs when the market connect those traders who mainly use technical trend-following methods.
Now, the trend begins its third phase, with the entry public. In the market situation is heating up, fueled by the media. The rapidly growing amount of speculation. At this stage, experienced traders who are on the rise the past trend of "accumulated", proceed to "spread" is the trend ends.
In addition, according to Dow theory, the indices must confirm each other. He meant the railroad and the industrial index, assuming that any significant signal to lower or raise the market rate, must be reflected in the values of these two indices.
Total trading volume should indicate the nature of the trend. Theoretically, the volume tends to grow in the same direction as the main trend. Until the signals are fed to change the trend, it will operate.
I would like to emphasize that "Dow theory" is of great importance when using technical analysis, since it is inextricably linked with this theory.
We strongly recommend that anyone who wants to become a successful trader to start learning technical analysis with a study of the main points of the Dow Theory.
On the principles and performance theory, is based the whole theoretical part of technical analysis.
Applying this theory to practice, a novice trader to quickly understand the nature and theoretical foundations of technical analysis.
The basic theory of the Dow Jones
The indices take into account everything. This position of the theory states that every factor that may in any way affect the supply or demand, will inevitably be reflected in the index. Often these changes are unpredictable, but nevertheless, they are necessarily taken into account by the market.
The Forex market has three types of trends:
With a clear downward trend each subsequent recession and the peak is lower than the previous one. With a clear upward trend every subsequent recession and higher than the previous peak. In severe horizontal, any subsequent recession and the peak is approximately the same level as the preceding.
Dow Jones, in his theory, also singled out three types of trends: primary (main), secondary (intermediate) and small (short). The most important, is the primary trend, the duration of which can be up to a year or even several years.
Secondary, the trend - it adjusts to the basic trends in duration from 3 weeks to 3 months.
According to Dow theory, the low tendency takes a maximum of three weeks and is short-term fluctuations in the range of intermediate or short-term trends.
The primary trend is divided into three phases:Accumulation phase. Here, the most far-sighted traders take positions on the purchase, because I had all the adverse economic aspects were taken into account by the market.
The onset of Phase 2 occurs when the market connect those traders who mainly use technical trend-following methods.
Now, the trend begins its third phase, with the entry public. In the market situation is heating up, fueled by the media. The rapidly growing amount of speculation. At this stage, experienced traders who are on the rise the past trend of "accumulated", proceed to "spread" is the trend ends.
In addition, according to Dow theory, the indices must confirm each other. He meant the railroad and the industrial index, assuming that any significant signal to lower or raise the market rate, must be reflected in the values of these two indices.
Total trading volume should indicate the nature of the trend. Theoretically, the volume tends to grow in the same direction as the main trend. Until the signals are fed to change the trend, it will operate.
I would like to emphasize that "Dow theory" is of great importance when using technical analysis, since it is inextricably linked with this theory.
We strongly recommend that anyone who wants to become a successful trader to start learning technical analysis with a study of the main points of the Dow Theory.
On the principles and performance theory, is based the whole theoretical part of technical analysis.
Applying this theory to practice, a novice trader to quickly understand the nature and theoretical foundations of technical analysis.
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