Technical analysis has always been a key tool in the financial arena. The founder of this strategy is widely thought to be Charles Dow, who created the Dow Theory, one of the cornerstones of technical analysis. Today, it is commonly accepted that understanding how to read prices and use technical analysis is essential for success in the markets.
One of the major lessons from Charles Dow’s Theory is that market prices reflect all known information. The idea is that when some big news hits the market, such as a major event or announcement, investors have a tendency to overreact and prices usually overshoot in either the short or the long term. The lesson is that investors should look for signs from the market that prices may have overshot the actual information and take advantage of it.
The Dow Theory also encourages investors to pay attention to price trends and use them to gain insight into future market movements. It suggests that analyzing the overall market trend can give investors a clearer view of where the market is headed. Trend analysis means that investors pay attention to the general direction of the market rather than focusing solely on individual stocks.
Charles Dow also developed the concept of support and resistance. This means that when a price reaches a certain level, either up or down, it will “bounce” back off that level, either due to market inertia or due to buyers’ and sellers’ expectations. This allows investors to develop strategies to identify and capitalize on price movements that tend to keep occurring at certain levels, rather than looking at individual stocks.
The Dow Theory also concentrates heavily on the idea of volume. When prices rise and fall, the volume of trades that take place can help investors identify levels of interest and strength. If a price increase is matched by a decrease in trading volumes, then it could be interpreted as a sign that the rally is due to a lack of opposition, suggesting that there may be a short-term upside potential.
These are just some of the vital lessons that Charles Dow’s Theory has provided. Investors who employ these principles within their strategies can have better success in the market. Of course, technical analysis is just one component of a successful trading strategy, and investors need to understand the importance of other elements such as fundamental analysis and momentum trading as well. Regardless, Charles Dow’s Theory has proven itself over many years and will likely remain one of the cornerstones of technical analysis.