Any attempts to trace the origin of technical analysis would inevitably lead to Dow Theory. While more than 100 Year old,Dow Theory remains the foundation of much of what we know today as Technical Analysis.

Dow Theory was formulated from series of Wall Street Journal Editorials authored by Charles H. Dow from 1900 until time of his death in 1902. This editorial reflected Dow's beliefs on how the stock market behaved and how the market could be used to measure the health of the business environment. 

Due to his death, Dow never published his complete theory on the markets, but several followers and his associates have published works . Some of the works derived from Dow Theory are

• "The Stock Market Barometer" (1922)- By William P.Hamilton's

• "How I Helped more than 10000 Investors To Profit In Stocks" (1960) By E.George Schaefer's

• "The Dow Theory Today" (1961) By Richard Russell's

 

 

The Three basic premises of Dow Theory is

1. Price discounts everything.

2. Price movements are not totally random

3. What is more important than why

 

 

The idea that market discounts everything is not new to technical traders. Like mainstream technical analysis, Dow theory is mainly focused on Price. However, the two differ in that Dow Theory is concerned with the moments of the broad markets, rather than specific securities. 

 

 

 

The follower of Dow Theory will look at the price moment of the major market indexes. Once they have an idea of prevailing trend in the market, they will take a investment decision. If the prevailing trend is upward, it follows that an investor would buy individual stocks trading at a fair valuation based on principle of Fundamental Analysis.

 

Dow first used his theory to create the Dow Jones Industrial Index and Dow Jones Rail index. He created this index because he felt they where and accurate reflection of the business conditions within the economy. While these indexes have changed over the last 100 Years, the theory still applies to current market indexes.                                                                                                                                                                   

 

 

According to Dow Theory, once a trendis confirmed by volume, the majority of money in the market should be moving with the trend and not against it.