Dow Theory
The Dow Theory is a methodology for analyzing and predicting
stock market movements in the United States. It originated from the editorials
of Charles Henry Dow, a journalist, the first editor of The Wall Street Journal,
and co-founder of Dow Jones & Company. After his passing, it was summarized
and named by William Peter Hamilton, Robert Rhea, and E. George Schaefer.
Now, I'd like to discuss with you the Dow Theory, which is a
technical analysis theory based on fundamental assumptions.
The market exhibits three types of trends:
Long-term trend: This trend generally lasts for more than 1
year.
Medium-term trend:
This trend typically persists for a duration of 3 weeks to 3 months. The
retracement range of an intermediate trend typically falls within the range of
1/3 to 1/2 of the preceding trend value, with the most common retracement being
50%.
Short-term trend: Short-term trends manifest as daily
fluctuations and are considered insignificant.
Price Trends: Price trends can be classified into three
categories
1. Accumulation Phase: Savvy Investors Take the Stage-Representing smart acquisitions, most participants are smart investors. If this trend continues, smart investors will buy the stock thinking it won't fall any further.
2. Public participation stage: the position of most investors-Most investors are at the stage of starting to enter the market, and most of the participants are ordinary investors. Prices began to rise rapidly and fundamentals and news began to improve.
3. Distribution stage: wise investors appear-Due to the favourable news from newspapers or media, the market fell into a selling atmosphere, and ordinary investors became more actively involved. At this point, smart investors who bought the stock at the bottom of the short-selling market begin to sell the stock. The broad index and the major stock indexes should have signals in the same direction.
Volume: A Crucial Trend Confirmation
Volume is a secondary consideration when determining whether
a trend is emerging, but confirming price signals is really important. The
price develops towards the general trend and the trading volume should
increase.
There are four principles for trading volume.
1. Upward Trend: The price increase increases and the price decrease decreases. Further confirmation of the uptrend. If there is a major breakthrough in the rise of the stock price, it should generally be accompanied by an expansion of trading volume. If it breaks through the previous high point, the trading volume will also be greater than the previous high point.
2. Downtrend: Increasing Price Declines and Diminishing Price Gains
In a downtrend, the magnitude of price declines typically
increases, while the extent of price gains diminishes. However, this is not
always the case, and indefinite downward movements can also occur.
3: When the upward momentum stops and the trading volume
expands, it can usually be regarded as a selling signal; when the downward
momentum stops and the trading volume expands, it can usually be regarded as a
buying signal.
4. Trend Persistence: A Guiding Principle in Technical
Analysis
Market sentiment regarding economic or business prospects
does not undergo abrupt 180-degree shifts. Consequently, existing trends tend
to persist until clear reversal signals emerge.
The general principle of the Dow Theory method is that if
you judge that the main trend of stock prices is rising, you can buy and hold
projects, and vice versa. Then sell the stocks you hold and check your
investment status. That is to say, the Daocheng theory is concerned with the
main trends of the market, rather than short-term stock price fluctuations.
Although stock prices are ever-changing, they always develop and change following
a certain trend. This certain trend of development and change can be found from
the price changes of some representative stocks in the stock market. Knowing
this trend, investors can predict the trend of stock price changes in the stock
market by studying the past movement trajectories of these stock prices.
Dow Theory boasts a broad range of applications. In the future, we will share detailed case studies demonstrating the practical application of Dow Theory and its implementation in real-world projects.
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