Loding Loading ...
ينطوي التداول في الأسواق المالية على مخاطر كبيرة من الخسارة قد تتجاوز الودائع وقد لا تكون مناسبةً لجميع المستثمرين.
قبل التداول‎، يُرجى التأكد من من الاستيعاب الكامل للمخاطر المرافقة للتداول
ينطوي التداول في الأسواق المالية على مخاطر كبيرة من الخسارة قد تتجاوز الودائع وقد لا تكون مناسبةً لجميع المستثمرين.
قبل التداول‎، يُرجى التأكد من من الاستيعاب الكامل للمخاطر المرافقة للتداول

Dow theory: explained

The Dow Theory, a financial markets theory developed by Charles H. Dow, rests on six basic tenets that were a precursor to modern-day technical analysis.

The Dow Theory, a financial markets theory developed by Charles H. Dow, rests on six basic tenets that were a precursor to modern-day technical analysis.

Charles Dow believed that the stock market as a whole was a reliable measure of global economic conditions and that by analyzing the global market, it was possible to accurately assess those conditions to identify the direction of important market trends as well as the likely direction of individual stocks.

Based on his theory, Charles Dow created the Dow Jones Industrial Index and the Dow Jones Rail Index (now known as Transportation Index), which were originally developed for the Wall Street Journal. Charles Dow created these indices as he believed that they would provide an accurate reflection of the economic and financial conditions of companies in two major economic sectors: the industrial and the railway (transportation) sectors.

Dow theory explained

The Dow theory is based on the analysis of maximum and minimum market fluctuations to make accurate predictions on the direction of the market.

According to the Dow theory, the importance of these upward and downward movements is their position in relation to previous fluctuations. This method teaches investors to read a trading chart and to better understand what is happening with any asset at any given moment. With this simple analysis, even the most inexperienced can identify the context in which a financial instrument is evolving.

Furthermore, Charles Dow supported the common belief among all traders and technical analysts that an asset price and its resulting movements on a trading chart already have all necessary information available and forecasted in order to make accurate predictions.

Dow theory trading strategy

Most trading strategies used today hinge on one key concept, the "trend". This was a novel idea when Charles H. Dow published his writings at the end of the 19th century. However, more than a century later, the Dow Jones Industrial Average market index, created by the American journalist to illustrate his theory, is probably now the most followed index on the planet.

For a better understanding of Charles H. Dow's writings and their implications, here are the six basic tenets that underpin Dow Theory.

One: the market discounts everything

In other words, the prices of stocks and indices reflect all available information, and the only information that cannot be reflected is that which is unknowable. This is known as the Efficient Market Hypothesis (EMH).

Two: the three-trend market

Dow Theory highlights that primary trends tend to last for one year or more. They dictate whether a market is bullish (upward moving) or a bearish (downward moving). Secondary trends are the corrective moves within a primary trend. They typically last between three weeks and three months, and lead to corrections (a drop in stock prices) in a bull market and rallies (upticks in stock prices) in a bear market. Finally, there are minor trends that only last a matter of days and which are largely "market noise", in other words, unpredictable short-term fluctuations in stock prices.

Three: primary trends remain in effect until a clear reversal occurs

This is one of the more controversial elements of Dow Theory. Indeed, reversals in primary trends can easily be confused with the emergence of secondary trends. The Dow Theory therefore advocates caution, as it is difficult to distinguish between the two until after the event.

Four: the three phases of primary trends

The first phase of primary trends determines that informed investors profit from an accumulation phase (before a bull market) or a distribution phase (before a bear market). Traders then move towards a second public participation phase, which is when the largest price movement occurs. Finally, the market experiences a third excess phase, characterized by a period of euphoria (at the end of a bull market), or of panic/despair (at the end of a bear market).

Five: volume must confirm the primary trends

The volumes must confirm along with price. The trend should be supported by volume. In an uptrend the volume increase as the price rises and should reduce as the price falls and while in a downtrend, volume must increase when the price falls and decrease when the price rises.

Six: primary trends must confirm each other across market indices

This last tenet, that two opposing primary trends cannot coexist on two different market indices, was doubtless the most important to Charles H. Dow. In other words, the primary trend discovered on a market index must always be confirmed by a similar trend on another market index and vice versa.

It was in response to this final tenet that Charles H. Dow did not stop at creating the Dow Jones Industrial Average. He also contributed to the development of another market index, the Dow Jones Transportation Average.

Does Dow theory work?

Although a lot has changed over the past 100 years, the Dow theory and his six tenets are still applicable today and are considered a valid trading strategy by many traders. Much of what we currently know about technical analysis has its root in the Dow theory. This is why all financial operators using technical analysis should be familiar with the six basic principles of the Dow Theory.

Source: CMC Markets UK

Disclaimer: Century Financial Consultancy LLC (“CFC”) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA). This document is a marketing material and is for informational purposes only and must not be construed to be an advice to invest or otherwise in any investment or financial product. CFC does not guarantee as to adequacy, accuracy, completeness or reliability of any information or data contained herein and under no circumstances whatsoever none of such information or data be construed as an advice or trading strategy or recommendation to deal (Buy/Sell) in any investment or financial product. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part.


By use of the publication and continuing to access the publication, you accept these terms and conditions and undertake to be bound by the acceptance. CFC reserves the right to amend, remove, or add to the publication and Disclaimer at any time without any prior notice to you. Such modifications shall be effective immediately. Accordingly, please continue to review this Disclaimer whenever accessing, or using the publication. Your access of, and use of the publication, after modifications to the Disclaimer will constitute your acceptance of the terms and conditions of use of the publication, as modified. If, at any time, you do not wish to accept the content of this Disclaimer, you may not access, or use the publication. Any terms and conditions proposed by you which are in addition to or which conflict with this Disclaimer are expressly rejected by CFC and shall be of no force or effect.

No information as given herein by CFC in this publication should be construed as an offer, recommendation or solicitation to purchase or dispose of any securities/financial instruments/products or to enter in any transaction or adopt any hedging, trading or investment strategy. Neither this publication nor anything contained herein shall form the basis of any contract or commitment whatsoever. Distribution of this publication does not oblige CFC to enter into any transaction.

The content of this publication should not be considered legal, regulatory, credit, tax or accounting advice. Anyone proposing to rely on or use the information contained in the publication should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts regarding information contained in this publication. CFC cannot be held responsible for the impact of any transactional costs or any taxes as may be applicable on transactions.

Information contained herein is based on various sources, including but not limited to public information, annual reports and statistical data that CFC considers reliable. However, CFC makes no representation or warranty as to the accuracy or completeness of any report or statistical data made in or in connection with this publication and accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained in this publication. The articles does not take into account the investment objectives, financial situations and specific needs of recipients. The recipient of this publication must make its own independent decisions regarding whether this communication and any securities or financial instruments mentioned herein, is appropriate in the light of its existing portfolio holdings and/or investment needs.

This document is a marketing material and has been prepared by individual(s), marketing and/or research personnel of CFC. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is purely a marketing communication. In this publication, any opinions, news, research, analysis, prices, or other information constitute is a general market commentary, and do not constitute the opinion or advice of CFC or any form of personal or investment advice. CFC neither endorses nor guarantees offerings of third party, nor is CFC responsible for the content, veracity or opinions of third-party speakers, presenters, participants or providers. CFC will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

Charts, graphs and related data or information provided in this publication are intended to serve for illustrative purposes only. The information contained in this publication is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to their determination. All statements as to future matters are not guaranteed to be accurate. CFC expressly disclaims any obligation to update or revise any forward-looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events.

Staff members/employees of CFC may provide/present oral or written market commentary or analysis to you that reflect opinions that are contrary to the opinions expressed in this research and may contain insights and reports that are inconsistent with the views expressed in this publication. Neither CFC nor any of its affiliates, group companies, directors, employees, agents or representatives assume any liability nor shall they be made liable for any damages whether direct, indirect, special or consequential including loss of revenue or profits that may arise from or in connection with the use of the information provided in this publication.

Information or data provided by means in this publication may have many inherent limitations, like module errors or lack accuracy in its historical data. Data included in the publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, credit risk etc.

The use of our information, products and services should be on your own due diligence and you agree that CFC is not liable for any failure to achieve desired return on investment that is in any manner related to availing of services or products of CFC and use of our information, products and services. You acknowledge and agree that past investment performance is not indicative of the future performance results of any investment and that the information contained herein is not to be used as an indication for the future performance of any investment activity.

This publication is being furnished to you solely for your information and neither it nor any part of it may be used, forwarded, disclosed, distributed or delivered to anyone else. You may not copy, reproduce, display, modify or create derivative works from any data or information contained in this publication.

Services offered by CFC include products that are traded on margin and can result in losses that exceed deposits. Before deciding to trade on margin products, you should consider your investment objectives, risk tolerance and your level of experience on these products. Trading with leverage carries significant risk of losses and as such margin products are not suitable for every investor and you should ensure that you understand the risks involved and should seek independent advice from professionals or experts if necessary.