Dow Theory is a foundational concept in technical analysis and is named after Charles Dow, one of the founders of Dow Jones & Company and the Dow Jones Industrial Average (DJIA). Dow Theory provides insights into market trends and the principles of price movement. It was developed in the late 19th century and remains influential in modern technical analysis. Here are its key principles:

The Market Discounts Everything: Dow Theory assumes that all available information is already reflected in market prices. This means that prices move in response to news, events, and other factors, and traders should analyze price action to understand market sentiment and trends.

There Are Three Market Movements:

Primary Trend: This is the long-term, major trend that can last for months or even years. It can be upward (bullish) or downward (bearish).
Secondary Reaction: This is a shorter-term trend that goes against the primary trend. It's considered a correction or pullback.
Minor Fluctuations: These are short-term, day-to-day price movements that can be erratic and are often influenced by noise.
The Primary Trend Has Three Phases:

Accumulation Phase: Smart money (institutional investors, insiders) starts accumulating positions in anticipation of a trend reversal.
Public Participation Phase: As the trend becomes more apparent, the public joins in, driving prices further in the direction of the primary trend.
Distribution Phase: Smart money starts selling their positions to the public as they believe the trend is nearing its end.
Indices Must Confirm Each Other: According to Dow Theory, for a trend to be valid, it should be confirmed by both the Dow Jones Industrial Average (representing the industrial sector) and the Dow Jones Transportation Average (representing the transportation sector). If both indices are making higher highs or lower lows, it's considered a confirmation of the trend.

Volume Should Confirm the Trend: Volume should increase in the direction of the primary trend. Rising prices on increasing volume in an uptrend or falling prices on increasing volume in a downtrend provide confirmation of the trend's strength.

Trends Continue Until a Reversal Is Confirmed: Dow Theory assumes that trends persist until there's a clear reversal signal, which should be confirmed by both price action and volume.

Dow Theory provides a framework for understanding market behavior and trend analysis, but it's important to note that it's just one of many tools used in technical analysis. Traders and investors often combine Dow Theory with other indicators and analysis methods to make informed decisions in the financial markets.
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