Question

Tell me what you know about Dow Theory and Technical Analysis.

How does the math work?

What charts/indicators/ratios would/do you utilize in your decision making?
Would/do you use technical analysis exclusively or would/do you also incorporate fundamental analysis?

Do you understand that the Efficient Market Hypothesis suggests, and most other academics believe, that technical analysis does not work? Does that bother you?

Answer 1

Ans)

Dow theory was developed by Charles Dow and it was reformulated by William Hamilton. The main tenet behind this theory is how the markets work and behave. According to the formulators of this theory, the stock market behaves the same today as it did almost 100 years ago. The trend behind these markets can be find out three types of price movements which are :

• Primary movements which last from few months to many years.
• Secondary movement lasts from few weeks to few months and move opposite to primary movements. They are very important as they are known as corrections in stock market which combat unneccesary speculation.
• Daily fluctuations lasts from few hours to few days but not more than a week.

An important part of Dow theory is Trend analysis. The market may move up ( peak) or rally below ( trough) so it is also known as peak and trough analysis. In this way trends are defined so it is divided into three parts known as:

• Primary trend which is the largest lasting for more than a year. It is the most important among all trends as it greatly affects the operations in stock market. It shows where the market is moving.
• Secondary trend is an intermediate one that lasts three weeks to three months. It is the correction of primary trend as it moves in the opposite direction.
• Minor trend often lasts less than three weeks. Due to its short-term nature , it is not of major concern in Dow's theory.

This shows the greaterthe time period of a trend, more important the trend is to know the direction where the market is moving. Dow theory helps investors to identify facts not assumptions. Predicting the market is difficult and is dangerous for the investors to assume.