Definition of Dow theory:
The Dow theory is an approach to trading developed by Charles H. Dow who, with Edward Jones and Charles Bergstresser, founded Dow Jones & Company, Inc. and developed the Dow Jones Industrial Average in 1896. Dow fleshed out the theory in a series of editorials in the Wall Street Journal, which he co-founded.
Argument that a stockmarket trend is not significant until both Dow Jones Industrial Average (DJIA) and Dow Jones Transportation indexes (indices) reach new highs or lows in lockstep. If they dont, it states, the market will revert to its former trading level. The theory argues that since the first index reflects the productive capacity and the second the volume of goods distributed, as long as they rise or fall together the economic trend will be maintained. Similarly, if the indexes move in opposite directions, a reversal in the trend is to be expected. This theory, however, does not attempt to forecast the duration of any trend. Named after Charles H. Dow (1851-1902), co-founder and the first editor of the Wall Street Journal (WSJ) who proposed it around 1900.
The Dow theory is a financial theory that says the market is in an upward trend if one of its averages (i.e. industrials or transportation) advances above a previous important high and is accompanied or followed by a similar advance in the other average. For example, if the Dow Jones Industrial Average (DJIA) climbs to an intermediate high, the Dow Jones Transportation Average (DJTA) is expected to follow suit within a reasonable period of time.
How to use Dow theory in a sentence?
- The Dow Theory is a technical framework that predicts the market is in an upward trend if one of its averages advances above a previous important high, accompanied or followed by a similar advance in the other average.
- In such a paradigm, different market indices must confirm each other in terms of price action and volume patterns until trends reverse.
- The theory is predicated on the notion that the market discounts everything in a way consistent with the efficient markets hypothesis.
Meaning of Dow theory & Dow theory Definition