Introduction to Dow Theory

By:
Aditya
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INVESTING 101 March 20, 2009

Dow Theory The Genesis of Technical Analysis

The origins of modern technical analysis can be traced back to the

work and theories of Charles Henry Dow (1851 1902). As a young
man, Dow arrived in New York in 1879 to be a reporter for a
financial news service. By 1882 he and Edward DJones had founded
Dow Jones and Company and were delivering their own news items to
Wall Street financial houses.

By studying the closing prices of shares Dow concluded that it was

possible to produce a market barometer or stock
average that could be used by investors to measure the overall
performance of the stock market. In July 1884, Dow produced his
first market measure calculated from the average of eleven stocks.
 Diffusion of information

Market Price
information
Value of

Information out of
value
Sources of information
 DOW THEORY
There are 6 basic tenets of Dow Theory

1. The market has three movements

2. Trends have three phases

3. The stock market discounts all news

4. Stock market averages must confirm each other

5. Trends are confirmed by volume

6. Trend exist until definitive signals prove that they ended

 1. The market has three movements

Major Trend (6 month 1 year)

Medium Trend (2 3 month)

Minor Trend (daily movement)

Trend
2. Trends have three phases
 The Market Cycle
Accumulation Phase

Participation Phase (Bullish / Bearish)

Distribution Phase (Excess, Panic, ranging)

4. Stock market averages must confirm each other
 Inter Market Correlation

Angka positif menunjukkan pergerakan harga yang searah

Angka negatif menunjukkan pergerakan harga yang berlainan arah
 Inter Market Correlation

Angka positif menunjukkan pergerakan harga yang searah

Angka negatif menunjukkan pergerakan harga yang berlainan arah
5. Trends are confirmed by volume (convergence)
5. Trends are confirmed by volume (Divergence)
Peak & Through
Peak & Through
 Begin and End of Bull trends

Return line acts as resistance

BUY

SELL

Price

Trend line acts as support

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Peak & Trough
 Optimizing Profit Factor
HSI market August 7 2007
 Optimizing Profit Factor
HSI market August 7 2007

Running on 1 minute/ 5 minute chart

How To Use Peak and Trough
Analysis

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SHORT TERM BAR CHART ANALYSIS

WHO Charge in The market

 Meaning of Bar component
Opening price Tend to reflect
the opinion of the public
reacting in emotional way to
what happening
Closing price .tell us where the
daily bull and bears was
resolve
HIGH represent the
maximums power of buyer
where supply overcome
demand seller took control
from buyer
Low the maximum power of
seller
 UP-DOWN TREND CONFIGURATION

The trend is determined in

accordance with Dow theory.
An up-trend is a series of
bars with higher highs and
higher lows. A down-trend is
a series of bars with lower
highs and lower lows

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 When does a Trend Start and
End?

An up trend is started by
a bar with a higher high
and higher low than the
previous bar. Conversely,
a down trend is started by
a bar with a lower high
and lower low than the
previous bar.