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What is Dow Theory in Trading?

Learn more about important trading and financial terms here. Need more help? Our team is ready.

The “Dow Theory” is used to analyse market trends and serves as the foundation of traditional technical analysis. It is based on the principles developed from the writings of Charles H. Dow. 

The primary principles of Dow Theory in trading are:

PrincipleExplanation
Market Discounts InformationMarket prices reflect available information and expectations.
Three Market MovementsMarkets are commonly analysed through primary, secondary, and minor movements.
Three Phases of a Primary TrendAccumulation, public participation, and distribution are used to describe stages of a major trend.
Averages Should Confirm Each OtherDow originally used industrial and transportation averages to assess confirmation of a broad market trend.
Volume Supports Price MovementVolume can provide additional evidence for a price trend.
Trends Persist Until ReversalAn established trend is considered to continue until sufficient evidence indicates a reversal.

Dow Theory Explained for India

The principles of Dow Theory can also be applied to Indian equity-market analysis. For example, when assessing market trends, traders may examine:

  • The Nifty 50 and Nifty-related market indicators
  • Price highs and lows
  • Volume, and 
  • Broader market participation 

However, Dow Theory only provides a framework for identifying trends. It cannot predict the exact timing or magnitude of future price movements.

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