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What Is Dow Theory?

Dow Theory is a classic framework for thinking about stock price movements proposed by Charles Dow, said to underlie much of modern technical analysis.

Basic principles

Dow Theory includes ideas such as "the average discounts everything," "there are three kinds of trends — primary, secondary, and minor," and "a trend is confirmed by volume." These are often introduced as ways of thinking about the overall tendency of price movements.

Its place in technical analysis

Dow Theory is said to underpin many later technical analysis methods, including moving averages and trendlines. That said, it remains just one framework for organizing price trends, and following it does not guarantee any particular outcome.

This article is provided for general informational purposes only and does not recommend or solicit the purchase or sale of any specific investment method or security. Final investment decisions are your own responsibility.

Frequently Asked Questions

Does following Dow Theory guarantee profits?
Dow Theory is one way of thinking about price trends and does not guarantee future prices or profits. Actual trading decisions should be made based on a range of information, not this framework alone.
When is Dow Theory typically used?
It is often referenced as a foundational way of thinking about trend analysis, used alongside other technical indicators such as moving averages and trendlines to gauge the overall direction of the market.

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