"The public, as a whole, buys at the wrong time and sells at the wrong time. The average operator, when he sees two or three points profit, takes it; but, if a stock goes against him two or three points, he holds on waiting for the price to recover, with oftentimes, the result of seeing a loss of two or three points run into a loss of ten points." ~Charles Dow
Charles Dow transformed the world of investing more than just about anyone in history. His ideas on market trend have been taught in millions of classrooms, forums, seminars, and trading floors all over the world.
Dow was born in 1851 on a rural farm. From the age of six he started working odd jobs to help support his family after his farther died. He wasn’t “learned” in Harvard and had no outstanding formal education. What he did have, which survives him today, was the ability to see trends in what was considered a sea of financial confusion.
Shortly after moving to New York in 1882 and starting Dow Jones & Co., Dow created the Dow Jones Industrial Average. An averaging of 11 major stocks listed on the exchange. Later, he also created the 20 stock Railroad Average (now the Transport Average). Dow never referred to his theories as the Dow Theory, and in fact, never took credit for it.
Dow’s theories of trend movement apply to nearly every market on Earth where traders respond to any type of movement with emotion.
The Dow Theory defines the (stock) market as moving within three movements. Each movement is defined as a time frame in which the market fluctuates in major and minor trends.
Dow stated these movements as being the Major Movements (trends), Secondary Movements, and the Intra-day Cycles. Within these movements are known as the Bull Markets, Bear Markets, and Ranging Markets.
We won’t cover all the particulars, just the points you need to know.
Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trend.
From the above below, we can see clear defined paths indicating Bullish and Bearish market conditions. At the same time, we also see an excellent example of “Trending” market conditions. The market is moving in a defined upward or downward movement.
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