Dow Theory | What Is Dow Jones Theory | Motilal Oswal

"What is Dow Theory? Let us understand in detail what is the Dow Theory. The Dow Jones theory is the most important and trusted theory of technical analysis. It was used even before the discovery of candlestick by the western world, even today Dow theory concepts are used extensively.
In this video we will talk about Dow theory and the principles of this theory. So, let us first discuss about what is Dow theory. Charles H Dow developed the Dow Jones theory in the late 19th century. He was also the co-founder of the Dow Jones financial news service which is more popularly known as the wall street journal. Willian Hamilton later compiled the journals written by Charles H Dow in the 1920s.
Even after 100 years the Dow Jones theory is still considered as an integral part of technical analysis. Now let us discuss the principles of Dow theory these principles of Dow Jones theory are also known as tenets there are six tenets which are considered to be the background of Dow Jones theory. First is the stock market discounts all information, the first principle of the Dow theory states that all the fears and expectations of the stock market participants as well as the news in the stock market whether past current or future are already discounted. In the stock prices except for the information like natural calamities like tsunami earthquake etc.
Next is the market has majorly three trends. The prices in the stock market move mainly in three trends first is primary trend, the primary trend is referred to as the trader's best friend. If the primary trend is moving in the upward direction, then it is considered to be an uptrend and if it is moving downward then it is considered to be a downtrend. Traders should trade in the direction of the ongoing trend to minimize their losses.
Next is the secondary trend when there is a pullback in the primary trend either in the upward direction or the downward direction. It is known as the secondary trend. Last is the minor trend the minor trend is the corrective move within the secondary trend and it moves against the direction of the secondary trend.
The next tenet is that the market has three different phases according to the Dow theory. The primary trend moves in three phases, first is accumulation which is the phase of buying undervalued stocks next is participation it is the longest phase with large price movements in the stocks. In this phase traders tend to buy more with confirmation of the ongoing trend. The last phase is distribution, this is the phase where the traders start selling their stocks in the hope that the market will start declining.
The next tenet is that indexes must confirm with each other. The ongoing trend is confirmed only when the different indexes like nifty large cap, nifty mid cap and nifty small cap confirm each other. Next the volume must confirm the trend. There should be an increase in the volume when the prices are moving in the upward or downward trend. The ongoing trend is confirmed only then.
The Dow theory helps investors to develop better trading strategies for maximizing their profits. Thank you for watching the video.

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