Understanding Dow Theory: Foundations of Technical Analysis and Trading Applications

Introduction to Dow Theory

Dow Theory, developed by Charles Dow, forms the foundation of modern technical analysis. It is a set of principles derived from Dow’s observations on market price movements and trends. While originally intended to analyze stock market trends, its concepts are widely applied across various asset classes, including forex, commodities, and cryptocurrencies.

Dow Theory helps traders identify market trends, confirm reversals, and make informed decisions based on price action rather than speculation.

The Core Principles of Dow Theory

Dow Theory is based on six key tenets:

1. The Market Discounts Everything

All known information, including fundamental data and market sentiment, is already reflected in asset prices. This assumption aligns with the Efficient Market Hypothesis (EMH).

2. The Market Moves in Trends

Markets experience three types of trends:

• Primary Trend: The major movement lasting from months to years (bull or bear market).
• Secondary Trend: A correction or…