Learn Dow Theory tenets
WHAT is Dow Theory?
WHY it exists: Dow noticed that stock averages move together in repeatable patterns. If you can distinguish a real trend from random wiggle, you can position with the tide instead of getting whipsawed by ripples.
The 6 Tenets (derived one by one)
Tenet 1 — The averages discount everything
- WHAT: Market price reflects all known information (except unpredictable acts of God).
- HOW to use: Don't chase news; read the price, because price already reacted.
Tenet 2 — The market has three trends
WHY the retracement range? A healthy correction shakes out weak hands but doesn't erase the trend. If a "correction" wipes out more than two-thirds, it's a warning the tide itself may be turning.
Tenet 3 — Primary trends have three phases
Tenet 4 — The averages must confirm each other
- WHAT: A trend signal is valid only when both the Industrial and Transport averages make new highs (or new lows) together.
- HOW: A new high in Industrials not confirmed by Transports = non-confirmation = weak/suspect signal.
Tenet 5 — Volume must confirm the trend
WHY: Volume = conviction. A price rise on thin volume means few people believe it — a hollow move likely to reverse. Volume is a secondary confirming tool, not a signal by itself.
Tenet 6 — A trend is assumed intact until a clear reversal
- WHAT: Give the existing trend the benefit of the doubt.
- WHY: This guards against selling on every wave/ripple (Tenet 2 noise) and getting whipsawed.
- HOW: Reversal is confirmed only when the higher-high/higher-low sequence flips (and Tenet 4 & 5 agree).
Worked examples
Common mistakes (steel-manned)
Flashcards
What does "the averages discount everything" mean?
Name the three trends by scale.
Typical retracement range of a secondary correction?
The three phases of a primary bull trend?
What is "confirmation" in Dow Theory (Tenet 4)?
What is a non-confirmation?
How does volume confirm a bull trend (Tenet 5)?
When is a trend assumed over (Tenet 6)?
Who organized Dow's editorials into "Dow Theory"?
Is Dow Theory leading or lagging?
Recall Feynman: explain to a 12-year-old
Imagine the sea. The tide slowly comes in over hours — that's the market's big direction. On top of the tide there are waves that go back and forth, and on the waves there are tiny ripples. If you only watch a ripple splash back, you'd wrongly think the whole sea is going out! Dow Theory teaches you to watch the tide. And here's a trick: Dow checks TWO things — the factory (making stuff) and the trucks (shipping stuff). If factories are busy but trucks are empty, the "boom" is fake. Also, if lots of people are pushing (big volume) in one direction, the move is real; if only a few push, it'll fizzle.
Connections
- Charts, Trends & Dow Theory
- Support and Resistance — Dow's higher-highs/lows define these levels
- Trend Identification — Tenet 6 in action
- Volume Analysis — Tenet 5 detail
- Efficient Market Hypothesis — modern echo of "averages discount everything"
- Elliott Wave Theory — descendant of Dow's tide/wave/ripple idea
Concept Map
Hinglish (regional understanding)
Intuition Hinglish mein samjho
Dekho, Dow Theory ka core idea bilkul samundar jaisa hai. Ek tide hoti hai (primary trend, 1–3 saal ka main direction), uske upar waves hoti hain (secondary corrections, 3 hafte se 3 mahine tak, jo tide ke against jaati hain), aur sabse upar chhoti ripples (minor noise, daily up-down). Zyadatar log ripple dekh ke ghabra jaate hain aur soch lete hain ki poora market palat gaya — yahi galti Dow Theory rokti hai. Tumhe tide padhna seekhna hai, wave se dar ke nahi bhaagna.
Dow ka sabse mast rule hai confirmation (Tenet 4): sirf ek average ka new high enough nahi. Purane zamane mein Industrials (factory production) aur Transports (shipping) dono ko saath mein new high banana padta tha. Agar factory to chal rahi hai par truck khaali hain, matlab boom fake hai — isko non-confirmation kehte hain, aur yeh ek warning sign hota hai. Isliye kabhi bhi ek index ke breakout pe blindly buy mat karo.
Do aur important cheezein: Volume confirm karta hai (Tenet 5) — agar price bull trend mein up ja rahi hai to rally pe volume badhna chahiye, pullback pe kam hona chahiye. Volume matlab logon ka conviction. Aur Tenet 6: trend ko chalne do jab tak clearly reverse na ho — higher-high, higher-low ka pattern tootne tak trend zinda maano. Yaad rakho, Dow Theory timing tool nahi hai — yeh lagging/confirming framework hai jo direction batata hai, exact top-bottom nahi. Isiliye ise "father of technical analysis" kehte hain.