|
Dow Theory The market changes with every trend can be predicted on the basis of price movements on the chart. The assumption of the Dow: Most stocks follow the underlying trend of the market. The trend of the underlying trend of the market is understood as "the average price index" - reflecting the general trend of a stock market represents. The premise: Only use closing prices: price reflects the closing price, can be predicted, and the impact on the relationship of supply and demand of the market |
• The daily fluctuations
• The impact on supply conditions - for the stock,
• The investment decision is expected no surprises
Dow Theory Explained
Dow Theory is based on six basic principles:
Principle 1:
• Include all information: economic factors, political and psychological factors, the ability to increase the company's profits
• All knowledge of all market participants (traders, investors, portfolio managers ...)
Principle 2: 3 The market shift:
1. The shift key (primary movement)
o In the first market price up (bull market) is a move up in a large way, at least 18 months.
o speculative market prices down (bear market)
As a long decline and will stop when there is a significant recovery in stock prices.
2. The secondary reaction:
o A significant decline in the market price speculation or a significant increase in the speculation market prices down
o The time period generally receding shifted from 33% - 66% (1/3 to 2/3)
o Extend from 3 weeks to several months, usually 3 months.
o It is important to form a major part of the movement as well as secondary displacement.
3. The small shift: (minor Movements) This shift represents MSU as a slight fluctuation in price over the trading day, going on a very short time.
Principle 3:
• Each trend generally occurs in three distinct phases
• In the bull market has three stages.
• Phase accumulation can purchase the savvy investor expertise
• the public participation phase: occurs when prices began to rise quickly and the news business will be improved
• Phase distribution: when the economic news gets better when the volume and nature of the involvement of the public and increase
• In the bear market has 3 stages:
• Phase distribution
• Phase panic
• Phase forced selling
Principle 4:
• The relationship creates value and volume basis
• The relationship is fundamental to increase the volume and value recovery narrow the discount.
• If volume becomes stagnant while prices rise and increase when prices fall, warning that the trend is reversed soon.
Principle 5:
Signs given rise to continuous rising prices create higher highs and discounts interjected forming higher bottoms. And contrary to sign off.
Principle 6:
Be aware of the combination index for each sector mutual. Eg:
• The industry average: the average price of 20 shares of American industry;
• The average transportation industry (Transportation): is the average price of 12 shares U.S. transportation sector;
• In a developing economy, the development industry, the transportation sector is second only to develop the industry average and the average transportation industry will reinforce each other.
