Charles H. Dow (1851- 1902) was first editor of the Wall Street Journal and co-founder of Dow Jones and Company. Between 1899 and 1902 Dow wrote a series of editorials for Wall Street Journal. He didn’t write any books about his thought and he never used Dow Theory term.
After Dow’s death William P. Hamilton, Robert Rhea and E. George Schaefer are great Dow Theorists that refined and improved Dow’s Theory. Now Richard Russell is the most famous Dow Theorist. He has published “Dow Theory Letters” since 1958. Dow Theory Letters is the oldest service continuously written by one person in the business.
Dow Theory is based upon the performance of the Dow Jones Industrial Average and transportation stock price averages. A buy signal is given when the Dow Industrial and Dow Transportation averages close above a prior rally peak. A sell signal is given when both averages close below a prior reaction low.
There are many books and articles about Dow Theory and I don’t want to explain the theory. Only I mention Dow’s six beliefs:
1. Markets have three trends (Primary, Secondary, Minor)
2. Trends have three phases
3. The stock market discounts all news
4. Stock market averages must confirm each other
5. Trends are confirmed by volume
6. Trends exist until definitive signals prove that they have ended
Does Dow Theory work today?
Some traders believe that theory doesn’t work today, but one hundred history shows that it has worked true. Today Dow theorists believe it is more valuable than the past. They believe for better using traders should try to gain a true understanding of the Dow Theory.
How to use the Dow Theory
You should consider that Dow Theory isn’t a certain and accurate way for predicting the market. It is a means for assisting investors and traders to avoid trading upon their emotions and helps them identify facts.
Dow Theory is not suitable for short-term trader, because short movements, from a few hours to a few weeks can be manipulated by large institutions, speculators, breaking news or rumors.