Definition
Dow Theory
Dow Theory is the foundational framework of technical analysis, describing how markets trend through primary, secondary, and minor moves.
Based on Charles Dow's writings, the theory states that the market discounts everything, moves in three trend degrees (primary, secondary, minor), and that a primary trend has three phases — accumulation, public participation, and distribution. It also requires that trends be confirmed by volume and by more than one related index.
For Indian markets, the principle of trend confirmation translates into checking whether Nifty and Bank Nifty (or broad and sector indices) are moving together to validate a trend. Dow Theory underlies the core idea behind support, resistance, and trend-following that every later indicator builds on.
Related terms
- Elliott WaveElliott Wave theory holds that markets move in repeating cycles of five impulse waves followed by three corrective waves.
- TrendlineA trendline is a straight line connecting a series of highs or lows to visualise the direction and slope of a trend.
- Support and ResistanceSupport is a price level where buying tends to halt a fall; resistance is a level where selling tends to cap a rise.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.