Dow Theory

In our previous lesson we learned about Market Structure and trends. In this lesson we'll look at Dow Theory, a theory that is widely considered one of the earliest forms of technical analysis in the western world. It was originally promulgated by Charles H. Dow who noticed that stocks tended to move up or down in trends, and they tend to move together, although the extent of their movements could vary. He used this knowledge to develop the Dow-Jones Averages that are still in use today. Charles Dow did not use his observations to forecast potential price movements but saw it as a barometer of the general business climate. After Dow's death in 1902, his close friend, Samuel A. Nelson attempted to explain Dow's methods in his book, The ABC of Stock Speculation. William P. Hamilton, who succeeded Charles Dow as the Editor of The Wall Street Journal, refined Dow's principles and developed them into a theory, which he explained in his book, The Stock Market Barometer: A Study of Its Forecast Value of 1922. Both Dow's work and Hamilton's work were analyzed and studied by Robert Rhea who refined Dow Theory further into the theory we know today, in his book, The Dow Theory of 1932.