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. At the end of the last class, we said that the Dow Theory has six major principles, so what are the six major principles? Today we will explain in detail.
Principle
1: The average price is inclusive of all factors. Sounds familiar, right? This is one of the basic premises of the technical analysis theory introduced in the first chapter, except that the average price is used here instead of the price of individual objects. This principle states that all factors that may affect supply and demand must be represented by average market prices, even 'acts of God' such as earthquakes or other natural disasters. Of course, no one can predict these disasters in advance, but once they happen, they will be quickly digested and absorbed by the market through price changes.
Principle Two: There are three trends in the market.
The definition of Dow's trend is that as long as the successive upward surges, the price peaks and troughs are correspondingly higher than the previous peaks and troughs, then the market is in an upward trend. In other words, an upward trend must be reflected in successively rising bees and valleys. In contrast, a downtrend is characterized by successively decreasing peaks and troughs. As will be discussed in Chapter 4, this is still the basic definition of trend and the starting point for all trend analysis.
Dow divides trends into three categories—major trends, minor trends, and transitory trends. The ones most concerned about are the main trend (or megatrend), which usually lasts for more than one year, sometimes even for several years. He firmly believes that most stock market investors love the main direction of the market. Dow used the sea as a metaphor for these three tendencies, corresponding to tides, waves, and ripples.
The main trend is like the tide, the secondary trend (or middle trend) is the waves in the tide, and the short-term trend is the ripples on the waves. From the embankment scale, we can read the highest position that each wave rolls in, and then by comparing the relative heights of these highest positions one by one, we can determine whether the tide is rising or falling. If the readings are increasing, the tide is still pushing land. Only when the peak of the wave gradually decreases, the observer can know for sure that the tide has begun to recede.
Minor trends (or midtrends) represent corrections in major trends and usually last from three weeks to three months. Such intermediate-sized corrections usually retrace to between one-third and two-thirds of the way through the preceding trend. A common retracement is about half, or fifty percent.
A short-term trend (or minor trend) usually lasts less than three weeks, and is a short-term fluctuation in the trend. When we discuss the concept of trends in Chapter 4, we will use almost the same terminology as here, and a similar retracement ratio.
Principle Three: Megatrends can be divided into three phases.
A megatrend typically consists of three phases. The first stage is also called the accumulation stage. Take the end of a bear market and the beginning of a bull market, for example, when all the so-called bad news about the economy has finally been absorbed and digested by the market, so the most astute investors begin to buy gradually shrewdly. In the second stage, the business news is getting warmer and brighter, and most technical investors who follow the trend start to follow up and buy, so the price rises rapidly. In the third and final stage, newspapers are full of good news, economic news is frequent, mass investors are actively entering the market, buying and selling actively, and the volume of speculative transactions is increasing day by day. It is at this final stage, when it looks like no one wants to sell from the market, but those smart people who took the opportunity to "accumulate" and eat step by step at the bottom of the bear market when no one else wanted to buy, began to "dissipate" ", gradually throw out to close the position.
Students who are familiar with the Elliott Wave Theory will certainly not be unfamiliar with the above-mentioned trilogy of major trends and the division of each with its own characteristics. On the basis of Ray's "Dow Theory" published in the 1930s, Eliot constructed his own wave theory. Elliott also recognizes that bull markets have three major up phases. In the "Elliott Wave Theory" article explained by Lao Zou before, we also showed that Dow's bull market trilogy is surprisingly similar to the wave-splitting characteristics of the wave theory. The main difference between Elliott theory and Dow theory is the principle of mutual verification, which we will talk about next.
Principle 4: Various average prices must mutually verify each other.
Specifically, Dow meant that the industrials and the railroads should validate each other, meaning that unless both averages gave equally bullish or bearish signals, no massive bull or bear market would be possible. In other words, in order to mark a bull market, both average prices must rise above the peak of their respective previous wave (mid-trend). If only one average price breaks the previous peak, it's not a bull market yet. It is not necessary for the two markets to send up signals at the same time, but the closer in time the better. If the behavior of the two average prices diverges from each other, then we consider the original trend to remain valid. Elliott Wave Theory differs from Dow Theory in that it only requires a single average price to give a signal. We will explain in detail the principles of mutual verification and mutual deviation later.
Principle 5: Trading volume must verify the trend.
Dow considers volume analysis to be secondary, but of great value as circumstantial evidence to validate price chart signals. In short, when the price is developing along the general trend, the trading volume should also increase accordingly. If the general trend is upward, the trading volume should be increasing when the price is rising, and the trading volume should be decreasing when the price is falling. In a downtrend, the opposite is true, volume expands when prices fall and shrinks when prices rise. Of course, we must emphasize that trading volume is the second reference indicator, and the buying and selling signals actually used by Dow Theory are based entirely on the closing price. In Chapter 7 we will discuss volume issues in more depth. But then you'll find that the basic principles are the same as here. Even with some of the more complex volume signals, the purpose is primarily to identify the direction of increasing or decreasing volume, which is then referenced against price changes.
Principle 6: Only when there is a definite reversal signal, can we judge that a given trend has ended.
We also touched on this basic principle in Chapter 1, which is the main basis of the trend-following method widely used today. This sentence actually means that an established trend has inertia and usually continues to develop. Having said that, it is easier said than done to judge the reversal signal. There are several useful ways to study things like support and resistance price levels, price patterns, trendlines and moving averages, from which we may be able to get signals about a change in the prevailing trend. Oscillators can even provide more timely warnings of the exhaustion of momentum in an existing trend. However, usually always choose the "trend will continue" side, more certainty. If you grasp this little secret, you will be able to make more successes than failures, and have a great chance of winning.
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