Dow Theory is the ancestor of all market technical research. Although he was often criticized for "reacting too late" and was sometimes ridiculed by those who refused to believe his judgment (especially in the early stages of a bear market), anyone with even a little experience in the stock market understood it. Heard and respected by most people. But what people never realize is that it is purely technical and based on nothing but the behavior of the stock market itself (often expressed in terms of indexes) rather than the business statistics on which fundamental analysts rely. The formation of Dow Theory took decades. In 1902, after Dow's death, William P. Hamilton and Robert Rhea inherited Dow's theory and added it to their subsequent writing of comments about the stock market. Organization and induction have become the theories we see today. Their "Stock Market Barometer" and "Dow Theory" have become classic works for future generations to study Dow Theory.
Worth it It is worth mentioning that the founder of this theory, Charles Dow, claimed that his theory was not used to predict the stock market, or even to guide investors, but was a barometer that reflected the overall trend of the market. Most people use the Dow Theory as a means of technical analysis - a very unfortunate view. In fact, the greatest thing about "Dow Theory" is its precious philosophical thought, which is its entire essence. Rhea emphasized in all relevant writings that "Dow Theory" is designed to be an aid or tool to improve the knowledge of speculators or investors, and is not a tool that can be divorced from basic economic conditions and market conditions. A comprehensive and strict technical theory. By definition, "Dow Theory" is a technical theory; in other words, it is a method of predicting future price behavior based on the study of price patterns.
Dow Theory The formation process of Research results that humans are identical.
Charles H. Dow (1851-1902) was born in New England. Founder of the Dow Jones financial news service in New York and founder and first editor of the Wall Street Journal. He was an experienced journalist who had been mentored in his early years by Samuel Powers, the distinguished editor of the Springfield Republican.
Dau had spent time working on the floor of the stock exchange, an experience that came as a strange surprise. The late Irishman Robert Goodbody (a Quaker and the pride of Wall Street) came to the United States from Dublin at that time, and because the New York Stock Exchange required every member to be an American citizen, Charles H. Dow became his partner. While Robert Goodbody had to wait to become a U.S. citizen, Dow held a seat on the stock exchange and executed orders on the floor. When Goodbody became a U.S. citizen, Dow quit the exchange and returned to his more beloved newspaper business.
Later, Dow established Dow Jones & Company, published the "Wall Street Journal", and reported financial news. From 1900 to 1902, Dow served as editor and wrote many editorials; discussing methods of stock speculation. In fact, he did not give a systematic explanation of his theory and only reported fragments of the discussion.
Charles Doyle created the stock market average index - the "Dow Jones Industrial Index" in 1895. When the index was born, it included only 11 stocks, nine of which were railroad companies. It was not until 1897 that the original stock index was derived into two, one was the industrial stock price index, which was composed of 12 stocks; the other was the railroad stock price index. By 1928, the stock coverage of the industrial stock index expanded to 30 types, and in 1929, the utility stock price index was added. Dow himself did not use them to predict stock price trends. Although he had only five years of data to study before his death in 1902, his views were quite successful in terms of scope and accuracy.
< All of Dow's works were published in the Wall Street Journal, and only a careful search in the precious archives of the Wall Street Bible can re-establish his theories on stock market price movements.But the late S. A. Nelson completed and published an unpretentious book in late 1902 - "The Basics of Stock Speculation." This book has long been out of print, but can occasionally be found at used booksellers. He tried unsuccessfully to persuade Dow to write the book, so he included everything he could find about Dow's stock speculation in the Wall Street Journal. Among the 35 chapters in the book, 15 (Chapter 5 to Chapter 19) are commentary articles in the Wall Street Journal, some of which have been slightly abridged. The contents include "scientific speculation", "methods of reading the market", "Methods of Trading" and the overall trend of the market
After Charles Dow passed away in December 1902, a reporter from the Wall Street Journal compiled his insights into the book "Preliminary Speculation", thus officially naming Dow Theory.
William Peter Hamilton conducted research under the guidance of Dow. He was the best spokesperson for "Dow Theory" at that time. After Dow's death, Hamilton took over in 1903 Dow served as the editor of the Wall Street Journal until his death in 1929. He continued to clarify and improve Dow's ideas, which were mainly published in the Wall Street Journal. Later, in 1922, he published He published the book "Stock Market Barometer", which concentrated on the essence of Dow Theory and gave "Dow Theory" more detailed content and formal structure. Hamilton added his own thoughts to many issues, among which Including market manipulation ("In an important bull market or bear market period, the positive forces will overwhelm market manipulation, which is incomparable to the latter"); speculation ("The day when speculation dies, the country will die.") ) even includes government regulation (“If there is any lesson worthy of the public’s memory in the past ten years, it is that when the government intervenes in private enterprises, even if the purpose of the enterprise is to develop public utilities, the result will be failure. Estimated losses and negligible gains”).
Robert Rhea was an admirer of Hamilton and Dow. From 1922 to his death in 1939, he worked reluctantly on his sickbed, using their theories to predict the stock market. Price, and achieved quite good results. Rhea made a great contribution to "Dow Theory". He incorporated the concept of trading volume, which added another basis for price prediction. The book "Dow Theory" was written by Bart Lun's Magazine was published in 1932 and is now out of print. Rhea excerpts the research results of William Pitt Hamilton in this book and provides many reference materials that are helpful for understanding "Dow Theory". Later, in < In the book "Applications of Dow Theory in Business and Banking", Rhea shows that "Dow Theory" can predict future economic activities stably and accurately.
Rhea is among all relevant writings They all emphasized that "Dow Theory" is designed to be an aid or tool to improve the knowledge of speculators or investors, and is not an all-round strict technical theory that can be divorced from basic economic conditions and current market conditions. By definition, "Dow Theory" is a technical theory; in other words, it is a method of predicting future price behavior based on the study of price patterns.
The Dow Theory reached its peak in the 1930s. At that time, the Wall Street Journal wrote daily stock market reviews based on the Dow Theory. On October 23, 1929, the Wall Street Journal published the article "The Tide Turns," which correctly pointed out that the "long market" was over and the era of the "short market" was coming. This article is a prediction based on the Dow Theory. Immediately after this prediction, a terrible stock market crash occurred, and the Dow Theory became famous for a while.
The Dow Theory was first used in the stock market to judge the rise and fall of the stock market and the rise and fall of the economy. Later, his successor William Peter Hamilton carried forward the famous Dow Theory. As a tool to speculate on investment market trends.
Dow proposed a proposition that has now become an axiom of modern financial theory, namely: the total risk associated with any individual stock includes systematic and unsystematic risks.
Among them, systemic risk refers to those general economic factors that will affect all stocks, while unsystematic risk refers to factors that may only affect a certain company and have no or almost no impact on other companies.
Because the Dow Theory reflects the general objective laws of benefits and risks in the investment market, more and more people have used this theory in the investment market in recent years. The results that have been verified in mature financial markets show that , Dow Theory is effective in predicting price trends.
In order to celebrate Dow’s contribution to investment market research, the American Association of Market Technologists awarded Dow Jones a Goldman Silver Bowl in recognition of Charles Doyle’s contribution to the investment analysis community. Dow's theory is regarded by today's authorities as a barometer of stock market activity. Today, 100 years after Dow's death, this immortal theory still remains a powerful tool for market technical analysts.
In Rhea's book <
Three extremely important assumptions in the "Dow Theory": The theoretical basis of Dow
The Dow Theory has The three extremely important assumptions are similar to the three assumptions that people usually see in technical analysis theory. However, here, Dow Theory focuses more on the understanding of its market implications.
Hypothesis 1: Manipulation - The daily and weekly fluctuations of indexes or securities may be affected by human manipulation, and secondary reactions may also have a limited impact in this regard, such as common The adjustment trend, but the main trend (Primary trend) will not be subject to human manipulation.
Some people may say that market makers can manipulate the main trends of securities. In the short term, if he does not operate, the nature of the securities suitable for operation will also be manipulated by others; in the long term, changes in the company's fundamentals continue to create conditions suitable for operating securities. In general, the main trend of the company is still that it cannot be operated manually, but the securities have changed to different institutional investors and different operating conditions.
Assumption 2: The market index will reflect every piece of information - every market participant who knows something about financial affairs, all his hopes, disappointments and knowledge will be reflected in the "Shanghai Composite Index" and "Shanghai Composite Index" The daily closing price of the "Shenzhen Index" or other index fluctuates; therefore, the market index will always appropriately anticipate the impact of future events. If disasters such as fires, earthquakes, and wars occur, market indices will also quickly assess them.
In the market, people continue to evaluate and judge endless topics such as financial policies, expansion, leaders’ speeches, institutional violations, GEM, etc. every day, and constantly reflect their own psychological factors. into market decisions. Therefore, the market always seems difficult to grasp and understand to most people.
Assumption 3: Dow Theory is an objective analytical theory - successfully using it to assist speculation or investment behavior requires in-depth research and objective judgment. When you use it subjectively, you will keep making mistakes and losing money. I can tell you another secret: 95% of investors in the market use subjective operations, and most of these 95% investors belong to the "seven losses" people in the "seven losses, two draws, and one profit". And I, fortunately, became an objective trader and investor.
Dow Theory consists of five "theorems":
Theorem 1--Dow's three trends (short-term, medium-term, and long-term trends)
The Basic Viewpoint Theorem of Dow Theory 1: There are three trends in stock indexes and any market: short-term trend, which lasts from days to weeks; medium-term trend, which lasts from weeks to months; and long-term trend, which lasts from months to years. In any market, These three trends must exist at the same time, and may be in opposite directions.
The long-term trend is the most important and the easiest to identify, classify and understand. It is the main consideration for investors, and is less important for speculators. Important. Both mid-term and short-term trends belong to the long-term trend. Only by understanding their position in the long-term trend can we understand them and make profits from them.
The mid-term trend is more important to investors. Secondary, but the main consideration for speculators. It may be in the same direction as the long-term trend, or it may be opposite. If the mid-term trend deviates seriously from the long-term trend, it is considered a secondary retracement trend or correction. The secondary retracement trend must be carefully evaluated and must not be mistaken for a change in the long-term trend.
The short-term trend is the most difficult to predict, and only traders will consider it at any time. Speculators and investors can only Only in a few cases do you care about short-term trends: looking for appropriate buying or selling opportunities in short-term trends to pursue maximum profits or minimize losses.
Classify price trends as The three trends are not an academic game. It is believed that if investors understand these three trends and focus on the long-term trend, they can also use the reverse mid-term and short-term trends to increase profits. There are many ways to use them. First , if the long-term trend is upward, he can short-sell the stock in the secondary retracement trend, and use the profit from the short position to increase the size of the long position near the turning point of the correction trend. Second, in the above operation, he can also Buy put options (puts) or lock call options (calls). Third, because he knows that this is only a secondary retracement trend and not a change in the long-term trend, he can, with confidence, Survive this correction trend. Finally, he can also use the short-term trend to determine the buying and selling prices to improve the profitability of the investment. The above strategy is also suitable for speculators, but he will not hold in the secondary retracement trend. Reverse position; his operation goal is to establish a position in the direction of the mid-term trend. Speculators can use the development of short-term trends to observe signs of changes in the mid-term trend. Although his mentality is different from investors, the basic principles for identifying trend changes are Quite similar.
Since the early 1980s, due to the advancement of information technology and the influence of computer program trading, the volatility of the market's mid-term trend has increased significantly. Since 1987, about 50 points have occurred in one day. Volatility is already a common occurrence in the market. For this reason, I (Victor Sporandi, author of "Principles of Professional Speculation") believe that the "buy-and-hold" strategy of long-term investment may need to be adjusted. To me, holding a long position during a correction and watching years of profits disappear seems like a waste and torture. Of course, in most cases, after months or years, In the future, these profits will still appear again. However, if you focus on the mid-term trend, these losses can generally be avoided. Therefore, I think that for financial market participants, it should be more appropriate to use the mid-term trend as a criterion. A wise choice. However, if you want to accurately grasp the mid-term trend, you must understand its relationship with the long-term (main) trend.
Theorem 2--Main trend (short or long market)
Basic views of Dow Theory
Theorem 2: Primary Movements: The main trend represents the overall basic trend, usually called a long or short market, and may last within one year. , or even for several years. Correctly judging the direction of the main trend is the most important factor in the success of speculation. There is no known method to predict the duration of the main trend.
Understand the long-term trend (Main trend) is the minimum condition for successful speculation or investment. If a speculator has confidence in the long-term trend and has appropriate judgment on the timing of entry, he can make quite good profits. About the main trend Although there is no clear prediction method for the amplitude and term length, historical price trend data can be used to statistically
Summarizing the main trends and secondary reversal trends.
Rhea classified all the price movements in the history of the Dow Jones Index according to type, amplitude and period length. He only had 30 years of data at the time. Available for use. Surprisingly, there is almost no difference between the results he classified at that time and the data in 1992. For example, the amplitude and duration of the secondary retracement trend, regardless of the data of the long and short markets Classified separately or comprehensively, the current normal distribution situation is almost identical to Raya's data at that time; the only difference lies in the number of data points.
This phenomenon is indeed worth noting, because it tells us that, Although there have been breakthrough developments in technology and knowledge in the past half century, the psychological factors driving market price trends are still basically the same. This has great significance for professional speculators: the price trends currently faced are of varying magnitude and duration. It is very likely to fall within the limited range of historical corresponding data averages (medians). If a certain price trend exceeds the corresponding average level, the statistical risk of intervening in this trend increases day by day. If properly weighed and applied, this risk assessment Knowledge can significantly improve the statistical accuracy of future price predictions
Theorem 3--The main short market (including three main stages)
The basics of Dow Theory Viewpoint
Theorem 3:
Main Bear Markets (Primary Bear Markets): The main bear market is a long-term downward trend, mixed with important rebounds. It comes from various This trend will end only after the stock price fully reflects the worst possible situation. The short market will go through three main stages: The first stage, market participation Investors no longer expect stocks to maintain over-inflated prices; the second stage of selling pressure reflects the decline in economic conditions and corporate earnings; the third stage is disappointing selling pressure from sound stocks, regardless of value, that many people are eager to buy. At least part of the stocks are now in existence. There are several aspects to this definition that need to be clarified. "Important rebounds" (secondary corrective trends) are the characteristics of the short market, but whether it is the "industrial index" or the "transportation index", It will never cross the top of a bull market, nor will both indexes simultaneously cross the highs of the previous intermediate-term trend. "Adverse economic factors" are (almost without exception) the result of government actions: interventionist legislation, very Serious tax and trade policies, irresponsible monetary or (and) fiscal policies, and important wars.
An individual has also classified the market index from 1896 to the present based on the "Dow Theory". Here are some characteristics of the short market:
1. Starting from the high point of the previous long market, the average decline (median) of the short market is 29.4%, of which 75% of the decline is between 20.4 % to 47.1%.
2. The average duration of the short market is 1.1 years, and 75% of the periods range from 0.8 to 2.8 years.
3 When a short market begins, it will usually "test" the previous long market high point with low trading volume, followed by a large number of sharp declines. The so-called "testing" means that the price is close to but will never cross the previous high point. point. During the "testing" period, low trading volume indicates a loss of confidence, which can easily evolve into "no longer expecting the stock to maintain an over-inflated price."
4. After a considerable period of decline, suddenly There will be a rapid upward secondary retracement trend, followed by a slight consolidation and shrinking trading volume, but in the end it will still fall to a new low.
5. Confirmation date of the short market ), refers to the date when both market indexes break through the latest correction low in the bull market. There may be a gap in the breakthrough time of the two indexes, which is not an abnormal phenomenon.
6. Short market The mid-term rebound usually shows an inverted "V-shape", in which the trading volume at low prices is high and the trading volume at high prices is low. Regarding the situation of the short market, another observation made by Rhea is very worthy of attention: < /p>
At the end of the short market, the market has become immune to further bad news and pessimistic views. However, after serious setbacks, the stock price seems to have lost the ability to rebound. Various signs show that the market has reached In an equilibrium state, speculative activities are inactive, and selling will no longer lower the stock price, but buying
The strength of the market is obviously not enough to push up the price... The market is enveloped in a pessimistic atmosphere, dividends are cancelled, and some large companies usually experience financial difficulties. Based on the above reasons, the stock price will show a narrow consolidation trend. .Once this narrow trend clearly breaks upward...the market index will show an upward trend with higher waves, and the mixed downtrends will not fall below the low of the previous downtrend. At this time. .....Clearly shows that long speculative positions should be established.
Theorem 4--The main long market (there are also three main stages)
The basics of Dow Theory Viewpoint
Theorem 4:
Primary Bull Markets: The main bull market is an overall upward trend, which is mixed with secondary retracement trends. On average, The duration is longer than two years. During this period, as the economic situation improves and speculative activities become more prosperous, investment and speculative demand increases, thus pushing up stock prices. The bull market has three stages: In the first stage, people are Confidence in the future economy is restored; in the second stage, stocks respond to known improvements in corporate earnings; in the third stage, speculation becomes intense and stock prices rise significantly - the stock price increases in this stage are based on expectations and hopes.
This definition also needs to be clarified. The characteristic of the bull market is that all major indexes continue to rise together, and the pullback trend will not fall below the low point of the previous secondary retracement trend, and then continue to rise to reach a new high price. In a secondary retracement trend, the index will not fall below the previous important low at the same time. The important characteristics of the main bull market are as follows:
1. Starting from the low point of the previous short market, the main bull market The average price increase is 77.5%.
2. The average period length of major bull markets is two years and four months (2.33 years). Of all bull markets in history, 75% of the periods The length is more than 657 days (1.8 years), and 67% is between 1.8 years and 4.1 years.
3. The beginning of the bull market and the last wave of secondary retracement trend of the short market. It is almost indistinguishable, and the only way is to wait for time to confirm.
4. In the secondary retracement trend in the bull market, the decline is usually more severe than the previous and subsequent rises. In addition, the trading volume at the beginning of the retracement trend is usually It is quite large, but the trading volume at the low point is low.
5. The confirmation day of the bull market is when both indexes break through the high point of the previous correction trend of the short market and continue to rise upward. days.
Theorem 5--Secondary retracement trend (also called "correction trend", a downward trend in a bull market, or an upward trend in a short market). The basic view of Dow Theory
Theorem 5:
Second Reactions: For the purpose of the discussion here, the secondary retracement trend is an important downward trend in the bull market, or an important upward trend in the short market. The trend usually lasts from three weeks to several months; the amplitude of the retracement during this period is 33% to 66% of the main trend after the end of the previous secondary retracement trend. The secondary retracement trend is often mistaken for the main trend. changes, because the initial trend of the long market may obviously be only a secondary retracement trend of the short market, and the opposite situation will occur after the top of the long market appears.
Secondary retracement trend (correction trend; Correction) is an important mid-term trend, which is a major retracement trend that goes against the main trend. Determining which is an "important" mid-term trend that goes against the main trend is the most microsecond and difficult aspect of the "Dow Theory" Ring; For speculators with highly expanded credit, any misjudgment may cause serious financial consequences.
When judging whether the mid-term trend is a correction trend, you need to observe the relationship between trading volume and the correction trend. Historical probability statistics, the general attitude of market participants, the financial status of each company, the overall situation, the policies of the "Federal Reserve Board" and many other factors. The trend is indeed somewhat subjective in the classification, but the accuracy of the judgment But it is of great importance. It is often difficult or even impossible for us to judge whether a trend is a secondary retracement trend or the end of a main trend.
My personal research is quite consistent with Rhea’s view. The retracement amplitude of most secondary correction trends is approximately the previous major trend band (primary swing; between two secondary retracement trends).
(the main trend during the period) is between 1/3 and 2/3, and the duration is between three weeks and three months. For all corrective trends in history, 61% of them have a retracement range of approximately Between 30% and 70% of a major trend band, 65% of the retracement periods are between three weeks and three months, and 98% of them are between two weeks and eight months. Price changes Speed ??is another obvious feature. Compared with the main trend, the secondary retracement trend has a tendency to rise and fall sharply.
The secondary retracement trend should not be confused with the minor (minor) retracement trend, which Often appear in major and minor trends. Small retracement trends are trends that go against the mid-term trend. In 98.7% of cases, they last no more than two weeks (including weekends and holidays). They are important for mid-term and long-term trends. Almost no impact at all. As of now (October 1989), the "Industrial Index" and "Transportation Index" have had a total of 694 mid-term trends (including ups and downs) in history, of which there are only nine secondary corrections. The period of the trend is shorter than two weeks.
In Rhea's definition of a secondary retracement trend, there is a key adjective: "important". Generally speaking, if any price movement results from economic fundamentals, It is a change in the aspect, rather than an adjustment in the technical aspect, and its price change range exceeds 1/3 of the previous major trend band, which can be regarded as important. For example, if the Federal Reserve adjusts the ratio of the stock market financing reserve fund from 50% The high is 70%, which will cause considerable selling pressure in the market, but it has no obvious relationship with economic fundamentals or corporate operating conditions. This price trend is a small (unimportant) trend. On the other hand, if A severe earthquake caused half of California to sink into the Pacific Ocean, and the stock market plummeted 600 points in three days. This is an important trend because many companies' earnings will be affected. However, small reversal trends and secondary correction trends The difference between them may not be very obvious, which is also one of the subjective elements in the "Dow Theory".
Ya likens the secondary retracement trend to the pressure control system in the boiler. In the bull market, the secondary retracement trend is The secondary retracement trend is a safety valve, which can release overbought pressure in the market. In the short market, the secondary correction trend is equivalent to adding fuel to the boiler to supplement the pressure lost by oversold
19th century 20 Richard Shabak, editor of Forbes magazine in the 1990s, inherited and developed Dow's ideas and studied how to apply important technical signals appearing in the "price average" to individual stocks. The book "Technical Analysis of Stock Market Trends" written by John Magee and Robert D. Edward, published in 1948, inherited and carried forward the ideas of Charles Dow and Richard Schabacker, and has now been Considered the definitive work on trend and pattern identification analysis.