Dow Theory: The Foundation of All Modern Technical Analysis
Dow Theory is the original set of principles about how markets move in trends. We explain the 6 core tenets, the three types of trend, and why it still matters after more than a century.
The set of principles that gave birth to technical analysis
Before RSI, MACD, or Japanese candlesticks, there was Dow Theory — the set of principles laid down by Charles Dow over a century ago, describing how markets move in trends. Almost every modern technical analysis tool builds on these original ideas.
The 6 core tenets
- The market discounts everything: all information (news, expectations, emotions) is already reflected in the price. This is the foundation of all technical analysis.
- The market has three types of trend: primary (long-term), secondary (medium-term), and minor (short-term).
- The primary trend has three phases: accumulation, public participation, and distribution (excessive speculation).
- Indices must confirm each other: a trend is reliable when multiple indices/groups confirm it.
- Volume must confirm the trend: volume should rise in the direction of the primary trend — a price rise on large volume is more reliable.
- A trend persists until a clear reversal signal: do not assume a trend has ended just because of a pullback.
The three types of trend
- Primary trend: lasts from months to years — like the "tide" of the sea.
- Secondary trend: corrections against the primary trend, lasting weeks to months — like "waves."
- Minor trend: short-term fluctuations over days — like "ripples," usually noise.
The lesson: do not mistake a secondary correction for a reversal of the primary trend.
How to identify a trend per Dow
According to Dow, an uptrend is defined by a series of higher highs and higher lows; a downtrend is a series of lower highs and lower lows. A trend reverses when this structure breaks (for example, an uptrend makes a low below the previous low). This is the very root of how trend identification works today.
Why it still matters after 100+ years
- A foundational framework: understanding Dow keeps you from getting lost in a "jungle" of indicators — always returning to the core question "what is the primary trend?"
- Avoiding trading against the primary trend: a common beginner mistake.
- The basis for later theories: Elliott Wave and many other methods inherit Dow ideas.
Conclusion
Dow Theory is the original set of principles describing how markets move in trends: price discounts everything, there are three types of trend, volume and mutual confirmation matter, and a trend persists until a clear reversal. After more than a century, it remains the foundational framework that helps you read the market without getting lost in indicators.
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