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Dow Theory Assignment

The document summarizes the key principles of Dow Theory, which analyzes stock market trends. There are 6 fundamental principles: 1) The market discounts everything, 2) The market is comprised of primary, secondary, and minor trends, 3) Primary trends have accumulation, public participation, and excess phases for bull markets and distribution, panic, and lack of buying phases for bear markets, 4) The industrial and transport averages must confirm each other for a valid trend change, 5) Volume must confirm the trend direction, and 6) A trend persists until a confirmed reversal signal.

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25 views

Dow Theory Assignment

The document summarizes the key principles of Dow Theory, which analyzes stock market trends. There are 6 fundamental principles: 1) The market discounts everything, 2) The market is comprised of primary, secondary, and minor trends, 3) Primary trends have accumulation, public participation, and excess phases for bull markets and distribution, panic, and lack of buying phases for bear markets, 4) The industrial and transport averages must confirm each other for a valid trend change, 5) Volume must confirm the trend direction, and 6) A trend persists until a confirmed reversal signal.

Uploaded by

valuedynamicmarine
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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DOW THEORY

REPORT

DATE \@ "MMMM d" \* MERGEFORMAT


May 14

BY: WILFRED BIN DOMINIC

1
WHAT IS DOW THEORY?

 Financial theory that says market is in upward trend if one of the averages
advanced above a previous important high (higher high -HH) and followed by a
similar advance in another average.
 It’s the sum of similar stock prices divided by the number of stocks being
summed that what we call stock average which provides overall feeling of how
similar stock move while eliminating the chaotic movement of individual stock.
 Based on investor psychology and supported by chart analysis.

6 FUNDAMENTAL PRINCIPLE:

1. The Market Discount Everything


 Reflect the combined activities of millions of traders, speculators and
investors at any one time.
 Individual stocks reflect everything that is known about it. As new info
arrivers, market participants quickly disseminate the information and
the price will adjust accordingly.
 Thus, every known and foreseeable event is discounted, as is every
condition that could effect the supply and demand of individual stocks.

2. The Market Comprised of Three Trends

 Primary Trend
 Usually lasts at least one year and can continue for many years. This trend
usually responsible for a price movement bull or bear of at least 20%
retracement.
 Interrupted by Secondary Trend that moves against the Primary Trend to
correct it when it becomes overstretched.

 Secondary Trend
 Interrupts the Primary Trend movement where it moving in the opposite
direction.

2
 Identifying Secondary Trend while it still in process of development is very
difficult.
 Estimate will last for at least three weeks but can continue several months and
usually make some retrace at 1/3 of previous price movement.

 Minor Trend
 Day to day fluctuations of the averages
 Usually lasts less than six days and not given any important to dow theory.

3. Primary Trends Have A 3 Phases

 Bull Market
 Accumulation Phase
 Occurs when astute investor start buying stocks at low price from sellers
who are under duress as the economic news is still bad and is often at it
worst.
 Trading activity still moderated during this phase but starting to
increase.

 Public Participation Phase


 Retail and average investor begin to notice the upward trend and joining
the market.

 Excess Phase
 Market reaches a point where experienced investors and traders begin
exiting positions while the larger average investing population continues
to add their position.

 Bear Market
 Distribution Phase
 Occurs when the astute investor that bought during accumulation phase
of previous bull market start to sell their position.

3
 Trading activity usually still high during this phase but is starting to
decrease.
 Panic Phase
 Bought stock at unreasonably high price and urge to liquidate the
position before losing to much capital.
 Price a fall faster than what they rise because panic is stronger feeling of
optimism and it create more sense of urgency.

 Lack of Buying Interest Phase


 Investors have lost hopes of correction or full reversal and continue
selling at scale.

4. The Averages Must Confirm Each Other

 The industrial and transport must confirm each other in order for a valid
change of trend.
 Both averages must extend beyond their previous secondary peak for a change
of trend to be confirmed. (HH-HL-HH-HL-HH-LH-LL-LH)
 In other words, the two averages must both moving in the same approximate
direction.
 If the two averages do not conform to the same trend, then the trend is not
100% valid.

5. The Volumes Must Confirms The Trend

 Dow theory focuses primarily on price action where volume is only used to
confirm uncertain situations.
 Volume indicates intensity or activity. Not direction.
 Volume should expand in the direction of the primary trend.
 If the primary trend is down, the volume should increase during market
declines.
 If the primary trend is up, the volume should increase during market
advances.

4
6. Trend Persist Until A Reversal Signal is Confirmed

 An uptrend is defined by a series of higher highs and higher low. In order for an
uptrend to reverse, price must have at least one lower high and lower low.
 When a reversal in primary trend is signaled by both industrial and transports,
the odds of new trend continuing at their greatest.
 However, the longer a trend continues the odds of the trend remaining intact
become progressively smaller.

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