Dow Theory

What it is

Dow Theory comes from Charles Dow's editorials in the Wall Street Journal around 1900, later organised by William Hamilton and Robert Rhea. Its main tenets: the market discounts everything known; there are three trends (primary, lasting months to years; secondary corrections; and minor day-to-day moves); primary trends have three phases (accumulation, public participation and distribution); related averages must confirm each other (originally the Industrials and the Rails, now the Transports); volume should confirm the trend; and a trend is assumed to continue until there is a clear sign it has reversed.

The higher-highs-and-higher-lows way of defining a trend, used in almost every method on this site, comes from here.

How to spot it

• Uptrend: each rally makes a higher high and each pullback a higher low.
• A reversal needs a lower high and then a break of the last higher low.

How to use it

• Trade with the primary trend and treat secondary moves as pullbacks.
• Use confirmation between related markets, such as ES and NQ, as extra evidence.

Common mistakes

• Calling a reversal on one lower high.
• Ignoring the trend because the latest few candles disagree.

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