InvestorQ : I have heard that technicals are largely based on something called the Dow Theory? What is Dow Theory and how does it work?
Arya Nanda made post

I have heard that technicals are largely based on something called the Dow Theory? What is Dow Theory and how does it work?

Answer
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Dhwani Mehta answered.
1 year ago


One of the biggest contributions of technicals has been the Dow Theory, which basically forms the foundation of technical analysis. The Dow Theory has been around for over 100 years and its contours have stood the test of time. Dow Theory is based on the premise that the market is in a bull run if one of its averages moves above a previous high and is followed up by similar such movement by other averages. Dow Theory also uses stock markets as a lead indicator of the overall economic conditions.

Dow Theory is very useful for long term trends. You will be surprised that although Dow Theory is a technical indicator it is also used by fundamental analysis. When long term valuation models are plotted, the Dow Theory can be useful in ratifying your valuation approaches. Many analysts and investors often look at fundamental analysis and technical analysis as two competing sciences of markets. That is incorrect. In fact, they are complementary. Fundamentals can identify value and technicals can help you time the market. The result of the combination will be a lot more refined!