Dow Theory and Trends (5): Past and Present of Dow Theory

       Smiling proudly at the stock futures exchange, smashing Wall Street! Hello everyone, welcome to the Technology Paradise, I am Lao Zou, the owner of the park.

       After many days of continuous study, we have laid a solid theoretical foundation for technical analysis and clarified some common questions about technical analysis, so we can get down to business. Starting today, I will explain to you the most famous technical analysis theory with a long history - Dow Theory.

​ It is said that on July 3, 1984, the Wall Street Journal published an article entitled "The Centennial Birth of the Outstanding Charles Dow Index". In the same week, Barron's Weekly, a sister publication of the Wall Street Journal, also published "The Dow Theory's Great Contributions to Investors in the Past Hundred Years". The above article is written to commemorate the centenary of Charles H. Dow's creation of the stock market average on July 3, 1884. When the index was born, it contained only eleven stocks, nine of which were railroad companies. until 1897. The original stock index was derived into two, one is the industrial stock price index, which is composed of 12 stocks; the other is the railway stock price index, which contains 20 components. By 1928, the coverage of the industrial stock index was expanded to 30 stocks, and in 1929, the utility stock price index was added. While new indices are proliferating, Dow's 1884 initiative is their common ancestor.

　　In this golden age, the Market Technical Analyst Association (MTA) also presented the Dow Jones Company with the Cohenmer Silver Bowl Award as a token of commemoration. The company was co-founded by Dow and Edward Jones in 1882. MTA wrote in his speech: "This award is specially awarded to Charles Dow, in recognition of his contribution to the field of investment research. Today, more than 80 years after his death, the index he created is still the market technology An indispensable and powerful tool for the analyst. At the same time, his creation laid the foundation for a variety of existing indices, which are widely regarded as barometers of stock market activity."

       Dow never wrote a book about his theory, which is our great loss. At the end of the last century, he published a series of editorials in the Wall Street Journal expressing his research experience on the behavior of the stock market. It was not until 1903, a year after his death, that these articles were collected and published in S. A. Nelson's "Common Sense on Stock Market Speculation" (reprinted by Fraser Publishing Company in 1978) . It was this work that first used "Dow Theory". In his preface to the book, Richard Russell compares Dow's contribution to stock market theory with Freud's to psychiatry.

　　Why do we bother to introduce the above background? Why is the Dow Theory so compelling? The answer is readily available. Most of the widely used technical analysis theories so far originated from the Dow Theory and were developed in various forms. Dow is the founder of technical analysis. Although it is now the world of computers, and a large number of new and said to be more effective technical indicators emerge in an endless stream, Dow Theory still has a place. Many technical analysts may not be aware of the extent to which their "modern" tools have inherited the underlying principles of Dow's findings. Therefore, I thought it necessary to give a brief introduction to Dow Theory before starting to study technical analysis.

　　Here, I think it is necessary to briefly introduce the life of Charles Dow. Charles Henry Dow (Charles Henry Dow, 1851-1902), born in Sterling, Connecticut, is the inventor of the Dow Jones Index and the founder of the Dow Theory, the founder of the Dow Jones financial news service in New York, and the editor of the Wall Street Journal Founder and first editor. An experienced journalist, he had been mentored in his early years by Samuel Bowles, distinguished editor of The Republican in Springfield. As noted above, Dow's ideas were initially contained in a series of review articles. Later, William Peter Hamilton, Dow's assistant and successor in the Wall Street Journal, summarized Dow's theory and published it in "Stock Market Barometer" published in 1922. Robert Ray further refined the Dow Theory and published the book "Dow Theory" in 1932.

​ Dow's research was conducted on the average stock market price he invented, that is, the industrial stock index and the railway stock index; The market is also easy to handle; the six basic principles have become the cornerstone of technical analysis. A more in-depth discussion of these six basic principles is reserved for later chapters.