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Dow Theory

Dow Theory: Introduction

Technical analysis has its roots in the past originating from what we know as the Dow theory. Dow theory is the foundation for technical analysis.
Charles Dow and Edward Joe founded Charles Dow & company in 1882.Dow published his articles in wall street journal. Dow used his theory on moving average of closing prices of the eleven stocks. Dow felt that these eleven stocks provided an indication of economic health of the country.
Unfortunately, Dow never wrote a book in his life. After his death in 1903, S.A. Nelson compiled a book titled The ABC of stock speculation. In that book, Nelson first coined the term “Dow Theory”. Dow theory has six basic tenets:
1. The average discounts everything.
2. The market has three trends.
3. The major trend has three patterns.
4. The averages have must confirm each other.
5. The volume must confirm the trend
6. A model is assumed to be in effect until it gives a definite signal that it has reversed.

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