Understanding of the Dow Jones Theory
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The Dow Jones Theory is a theory that was developed by Charles Dow, in 1897. After Introducing this theory it didn't just stop there instead the theory followed his death based on the so many editorials books on technical analysis that he had published with the years of 1900 to 1902.
The Dow theory, is a financial theory that explains whether a market is moving in an uptrend or downtrend. It's a theory that is used by both investors and traders to understand how healthy the market situation is. However, in a nutshell, the Dow theory is know as a technical framework that predicts if a market is moving in an uptrend or not nor whether one of its averages has move above a prior high that is so important accompanies by a similar move of other average.
There are six principles that explains how the Dow theory works and these principles are;
one of the principle is that the market discounts all information
the second is that The market trend are of three types
the third one is that the market has three differnent trends, which are; primary, secondary and minor trends.
the fourth is that the trend has different phases, which are; accumulation, public participation and panic (distribution) phase.
The fifth is that the indices has to confirm each other first.
And finally the six is that the trend must be confirmed by volume.
Important of Dow Theory in technical analysis
The Dow theory is very important on technical analysis as it helps traders/investors in Identifying market trends with a very important accuracy, so that both traders and Investors can make use of the advantage of potential price actions level. Another reason why I think Dow Jones Theory is important again is that the theory helps traders be caution with the market trends.
This makes traders not to go against the market trends but to always be caution as to what they do in the market. In all and all, Dow theory is important in technical analysis as it focuses on how important closing price is which make to be a better Indicator of the market as a whole.
This is particularly because the closing price of a asset is determined, based on how traders reacted as the trading for that day get closer. This help traders to know the direction of where the market is going. And finally, to this Dow Jones Theory can help us to make a good trading decisions.