Dow Theory tenets | ForexGen

The first tenet of Dow Theory is that the Markets Have 3 Trends.

• Up Trends which are defined as a time when successive rallies in a security price close at levels higher than those achieved in previous rallies and when lows occur at levels higher than previous lows.

• Down Trends which are defined as when the market makes successive lower lows and lower highs.

• Corrections which are defined as a move after the market makes a move sharply in one direction where the market recedes in the opposite direction before continuing in its original direction.

The second tenet of Dow Theory is that Trends Have 3 Phases:

• The accumulation phase which is when the “expert” traders are actively taking positions which are against the majority of people in the market. Price does not change much during this phase as the “experts” are in the minority so they are not a large enough group to move the market.

• The public participation phase which is when the public at large catches on to what the “experts” know and begin to trade in the same direction. Rapid price change can occur during this phase as everyone piles onto one side of a trade.

• The Excess Phase where rampant speculation occurs and the “smart money” starts to exit their positions.

The third tenet of Dow Theory is that The Markets Discount All News, meaning that once news is released it is quickly reflected in the price of an asset