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Dow Theory

Technical Analysis dates back hundreds of years ago. According to historical records, a great Japanese rice trader by the name of Homma Munehisa (1724-1803) fathered candlestick charting and at today’s value, would have made over $100 billion in profits. He was considered the greatest trader in the history of the financial markets. This type of charting will be covered in subsequent articles (candlestick charting will be used in all articles). Therefore, technical analysis emerged from Japan.

In the U.S., technical analysis first started to gain some following due to Charles Dow’s Dow Theory in the late 19th century. Charles Dow formed 6 principles that formed the foundation of technical analysis.

DOW THEORY

Dow Theory on stock price movement is a form of technical analysis that includes some aspects of sector rotation. The theory was derived from 255 Wall Street Journal editorials written by Charles H. Dow (1851–1902), journalist, founder and first editor of the Wall Street Journal. Following Dow's death, William Peter Hamilton, Robert Rhea and E. George Schaefer organized and collectively represented "Dow Theory," based on Dow's editorials. Dow himself never used the term "Dow Theory," nor presented it as a trading system. The six basic tenets of Dow Theory as summarized by Hamilton, Rhea, and Schaefer are described below.

  1. The market has three movements
  2. Market trends have three phases
  3. The stock market discounts all news
  4. Stock market averages must confirm each other
  5. Trends are confirmed by volume
  6.  Trends exist until definitive signals prove that they have ended

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