Stock Market · Technical Analysis

Dow Theory

Where all of this came from

Charles Dow (co-founder of Dow Jones) developed the first framework for understanding market behavior in the late 1800s. Nearly every concept in the chapters before this one, trends, confirmation, the idea that price discounts everything, traces back to his principles. Having used them, here is the theory underneath them.

The six tenets of Dow Theory

1. The market discounts everything: All known information is already reflected in prices. The same assumption that underpins all of TA.

2. There are three trends: Primary trend (months to years), Secondary trend (weeks to months, counter to primary), and Minor trend (days to weeks, noise within secondary).

3. Primary trends have three phases:

• Accumulation (smart money buys quietly)
• Public participation (trend becomes obvious, majority joins)
• Distribution (smart money sells to the public)

4. Indices must confirm each other: Dow originally required the Industrial and Rail averages to confirm signals. In India, if Nifty 50 and BSE Sensex diverge, the signal is weaker.

5. Volume must confirm the trend: Rising price + rising volume = healthy trend.

6. A trend continues until a definitive reversal signal is given: Don't fight the trend. Assume it continues until proven otherwise.

> 'The trend is your friend until the end when it bends.'. Dow Theory's practical summary

The three-phase primary uptrend

Phase 1 (Accumulation): After a downtrend, smart money quietly buys. Sentiment is terrible, news is bad. Volume is low.

Phase 2 (Participation): Trend becomes visible, technical traders join, volume increases, media coverage grows.

Phase 3 (Distribution): Euphoria. Everyone is bullish, prices are high, smart money is quietly selling. This is when retail often enters.

130 years oldand Dow Theory's core insights still hold because human psychology hasn't changed

Takeaway. Dow Theory: trends have 3 phases (accumulation → participation → distribution). Volume must confirm. Trend continues until a reversal is proved.