InvestorQ : What exactly is Dow Theory in technical analysis and does it really work in the Indian markets?
Mahil Khan made post

What exactly is Dow Theory in technical analysis and does it really work in the Indian markets?

Answer
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Jignesh Gupta answered.
1 year ago


Dow Theory is all about studying and understanding market behaviour based on charts. It is not so much about the chart trends but the psychology of the investors and traders that underlie the creation of these chart trends. Charles Dow developed a series of principles for understanding and analyzing market behaviour which later became known as Dow Theory. In a way, the Dow Theory became the cornerstone or the very basis of the study of technical analysis. Charles Dow believed that prices moved in waves or trends and we could also refer to them as patterns. Dow believed that much like a rising tide where the waves would move further up the beach with each ebb and flow and cause smaller ripples, so too would stock prices.

Conversely, once the tide had peaked and changed to move further down the beach until low tide, so too would stock prices. When we talk of trends, momentum, strength, relative strength etc in technical analysis; all these factors actually owe their origins to the Dow Theory in some form or the other. In fact, Dow Theory is the first serious attempt made by experts to sit down and document the shape and implications of different types of underlying trend cues that the market consistently throws up. This may seem like a simple concept but it is part of the foundation of the modern study of trends in stock prices. IN fact, it is said that you cannot really understand technicals in its proper perspective unless you understand the basics of Dow Theory to perfection.