Dow Theory is the originator of all market technology analysis and research. Its founder Charles Henry Dow founded Dow Jones Financial News Service and is believed to have invented the stock price average index. The basic principles of this theory later named after him were gradually mentioned in his editorial for the Wall Street Journal. After the death of Tao in 1902, his successor William Peter Hamilton inherited his theory, and organized and reorganized it in his 27 years of stock comment writing career, making it the Dow theory we see today.
Three assumptions of Dow's theory:
Hypothesis 1: Human operation
The daily and weekly fluctuations of indexes or securities may be subject to manual operation, and the secondary reentry trend may also be limited by this aspect, such as the common adjustment trend, but the main trend will not be subject to manual operation. Some people may say that the dealer can operate the main trend of securities. In the short term, if he does not operate, the essence of the securities that are suitable for operation will also be operated by others. In the long term, changes in the fundamentals of the company will not create conditions suitable for operating securities. In general, the main trend of the company is still unable to operate artificially, but the securities have changed for different institutional investors and different operating conditions.
Hypothesis 2: The market index will reflect every piece of information
Every market person who knows something about financial affairs, all his hopes, disappointments and knowledge will be reflected in the daily fluctuations of the closing prices of the Shanghai Stock Exchange Index, Shenzhen Stock Exchange Index or other indexes, so the market index will always properly predict the impact of future events. In case of fire, earthquake, war and other disasters, the market index will also quickly evaluate them. In the market, people evaluate and judge endless topics such as financial policies, expansion, leaders' speeches, institutional violations, GEM, and constantly reflect their psychological factors into market decisions. Therefore, the market always seems difficult for most people to grasp and understand.
Hypothesis 3: Dow's theory is an objective analytical theory
Successful use of it to assist speculation or investment requires in-depth research and objective judgment. When it is used subjectively, it will make mistakes and lose money continuously. A fact that cannot be ignored is that 95% of investors in the market use subjective operation, and the vast majority of these 95% of investors belong to those who lose seven, lose two, even one and earn one.
After understanding the three hypotheses of Dow theory, let's learn about the five theorems of Dow theory.
Theorem 1: Among the three trends in Dow's theory, the first trend is the most important. It is the main trend. The overall upward or downward trend is called the long market or short market, and the period may last for several years.
The second trend is the secondary turn back trend, which is an important downward trend in the main long market or a rebound in the main short market, usually lasting for several months.
The third trend is usually less important. It is a daily fluctuation trend. There are three trends in the stock index and any market. The short-term trend lasts for days to weeks, the medium-term trend lasts for weeks to months, and the long-term trend lasts for months to years. In any market, these three trends must exist at the same time, and they may be opposite to each other.
Long term trend is the most important and easy to identify, classify and understand. It is the main reference for real long-term investors and less important for speculators. Both medium-term and short-term trends are subordinate to long-term trends. The medium-term trend is the main consideration of professional speculators. It may be the same direction as the long-term trend or the opposite. If the medium-term trend seriously deviates from the long-term trend, it will be considered as a secondary reentry trend or correction. The secondary reentry trend must be carefully evaluated, but it cannot be considered as a change in the long-term trend.
The short market will go through three stages. In the first stage, market participants no longer expect stocks to maintain excessively inflated prices. In the second stage, the selling pressure of the market reflects the recession of economic conditions and corporate earnings. In the third stage, the disappointing selling pressure comes from sound stocks. Regardless of the value, many people are eager to cash out some stocks.
Theorem 4: Main bull markets. The main bull market is an overall upward trend, which is mixed with secondary retracement trend, and the average duration is longer than two years. During this period, as the economic situation has improved and speculation has flourished, the demand for investment and speculation has increased, thus pushing up the stock price.
The bull market has three stages. In the first stage, people regained confidence in the future prosperity. In the second stage, stocks reflected the known earnings improvement of the company. In the third stage, the speculative boom turned red and the stock price expanded significantly. In this stage, the stock price rose in anticipation. The feature of the bull market is that all major indexes continue to rise, and the callback trend will not fall below the low point of the previous secondary retracement trend, and then continue to rise to a new high. In the secondary turn back trend, the index will not fall below the leading important low at the same time.
Theorem 5: Secondary turn back trend. The secondary turn back trend is an important downward trend in the long market or an important upward trend in the short market, which usually lasts for three weeks to several months. During this period, the turnback range was 33% to 66% of the main trend range after the previous secondary turnback trend ended. The secondary turn back trend is often mistaken for a change in the main trend, because the initial trend in the bull market may obviously be the secondary turn back trend in the short market. The opposite happens at the top of the bull market. The secondary turn back trend, that is, the correction trend, is an important medium-term trend. It is a major turn back trend against the main trend. Judging which is the medium-term trend against the main trend is the most subtle and difficult part of Dow theory.
When judging whether the medium-term trend is a correction trend, it is necessary to observe the relationship between trading volume. The statistical data of the history of the revised trend, the general attitude of market participants, the financial situation of each enterprise, the overall situation, the policies of the Ministry of Finance, and many other factors.
Many principles of Dow's theory are contained in various investment terms we use everyday, but ordinary people do not realize it. After studying the basic principles of Dow's theory, we have an important knowledge and concept, which is the basis for guiding us to make profits in the securities market.
