The Dow Theory was developed in the early twentieth century to assess the overall state of the economy, but in the future speculators took her into service for the market analysis. Dow Theory is composed of 6 ideas. Index takes into account everything. All information which is available to market participants immediately accounted for in share price. The market constantly, there are three trends. The first trend – global. It lasts for years. The second trend – the movement against the main trend, ie it correction, which may last several months.
The third kind of trend – a slight movement of the second trend. In this case, their direction may coincide with major market movement, and whether to be against him. Home trend has three phases. The first phase – a period of decline in the economy. The bulk of investors’ negative attitude to investment. Recommendations of brokers and experts – to sell. Stocks and other assets are very cheap.
During this period, most informed and far-sighted players are anxious to buy assets. The second phase is characterized by improved overall economy. Come into play, technical analysts, who noted a clear reversal trend. At the third phase has a peak in corporate profits, is the rapid growth of the economy. The general public begins to aggressively buy all types of assets. However, investors who bought in the first phase are gradually close their positions. It is worth adding that the market tended to remain investors buying on the first and second phases. the rest of the audience does not make big capital ilivovse loses a significant portion of their investment. Indices must confirm each other. This means that if the indices move in one direction, but in this case the market is a clear trend. Trend remains unchanged, there is no clear signal changing trends. Until all stock market indices do not show apparent reverse trend is unchanged. Volume must confirm the trend. Volumes should grow in the direction of the prevailing trend. Recall the third idea of the theory of the three phases of the trend. The volume will increase when the game will include all new members. Despite more than a century, Dow Theory does not lose its relevance in the present. As an example, look at the timetable for any action a large company and before you invest your money is to answer the question: what phase is now on the market?