Chapter 18 · Dow Theory
Dow Theory
Three trends, three phases, and the confirmation rule that made it a method.
Dow Theory was built on watching two averages confirm each other, and NEPSE has one exchange — so the confirmation rule has to be adapted rather than recited, using the sub-index of the sector leading the move. Everything below is the original method; the Nepal adaptation follows in the next lesson.
The three trends running at once
Charles Dow never wrote a book. His observations were collected after his death in 1902 — first by S. A. Nelson, then systematised by William Hamilton in 1922. Both books are out of copyright and hosted on this site, so you can read the source rather than a summary.
| Trend | Length | Character |
|---|---|---|
| Primary | A year or more | The tide. What matters to an investor. |
| Secondary | Three weeks to three months | Retraces a third to two-thirds of the primary move. |
| Minor | Days | Noise. Dow thought it unforecastable. |
The three phases of a primary trend
- Accumulation — informed buying while sentiment is still poor.
- Public participation — the trend becomes obvious; most of the move happens here.
- Distribution — the informed sell into general enthusiasm.
The rules
- 1The averages discount everything already known.
- 2Volume must confirm the trend.
- 3One average must be confirmed by another.
- 4A trend is assumed to continue until clearly reversed.
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