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Today we will look at the main ideas expressed by Charles Dow.
But first, who is Charles Henry Dow? Most people associate his name with stock indices. Indeed, it was Dow who proposed assessing the state of the economy by index movements. Charles Dow did not write a single book; he published all his ideas about economic laws only in a series of articles in the Wall Street Journal, which he founded with his companion Jones. Hence the name “Dow Jones Index”.
Let's return to the main ideas expressed by Charles Dow: The market takes into account everything that even the most competent analyst cannot say. Dow identified three trends in price movements: primary, secondary and minor. They are often called differently: long-term, medium-term and short-term trends. These concepts are quite relative: it all depends on what scale, or in modern terms - what time frame, we are looking at the market. According to the Dow, major trends last for more than a year, secondary trends last up to three months, and minor trends last up to three weeks.
The main sign of a major trend, say bullish, is the presence of rising highs and lows. By secondary movement, the Dow meant what we now usually call a correction. The magnitude of the correction, according to the Dow, can be from a third to two thirds of the main movement. Some traders still focus on this, although Fibonacci levels have also become popular.
Secondary movements do not occur in a straight line, but consist of several small movements. According to the Dow, short-term movements are the least predictable: they can occur against the backdrop of even not very important news, or they can be initiated by a large transaction. Dow considered small trends unimportant.
In the main trend, Dow identified three fundamental movements. As an example, consider a bull market. When prices fall, professionals are the first to buy. This is the first growth, the first phase of the bull market. After the correction, growth resumes, and the majority of traders join it. Economic indicators are high at this time.
The third upward movement is of a rush nature: amateurs are buying everything, and professionals are preparing to close long positions. We can say that C. Dow described the first five Elliott waves.
The Dow used trading volume as an auxiliary measure of the underlying trend. In his opinion, the presence of a “bullish” underlying trend is confirmed if volume increases during growth stages; in a “bear” market, volume should increase during downturns.
These are the main ideas that Charles Dow expressed at one time. Until now, they remain relevant when conducting trading operations.
