2009-06-16: A quick look at Dow theory
The investment and trading landscape has changed drastically over the last years. Individuals have access to more information and tools, and trades are executed almost instantaneously

However, traders ask the same questions today as they did in olden days. Which way is the market moving? How far up or down will it go? And when will it go the other way? These are still the basic concerns in modern times.

At the turn of the century, the Dow Theory laid the foundations for what was later to become modern technical analysis. Some of his focal points are commented below.

Price discounts everything
Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all the market price reflects the total knowledge of all participants, including traders, investors, portfolio managers, technical analysts, fundamental analysts and many others. It would be recklessness to differ with the price set by such an impressive group of people. Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.

Prices Movements are not Totally Random
Most technicians agree that prices trend. However, most technicians also acknowledge that there are periods when prices do not trend. If prices were always random, it would be extremely difficult to make money using technical analysis

A technician believes that it is possible to identify a trend, invest or trade based on the trend and make money as the trend unfolds. Because technical analysis can be applied to many different time frames, it is possible to spot both short-term and long-term trends. Dow theory identifies three trends within the market: primary, secondary and minor. A primary trend is the largest trend lasting for more then a year, while a secondary trend is an intermediate trend that lasts three weeks to three months and is often associated with a movement against the primary trend. Finally, the minor trend often lasts less than three weeks and is associated with the movements in the intermediate trend.

"What" is more important than "Why"
In times with an overload of information, technical analysis focuses on the current price and the history of the price movement.
The price is the end result of the battle between the forces of supply and demand. The objective of analysis is to forecast the direction of the future price. By focusing on price and solely on price, technical analysis represents a direct approach. Fundamentalists are concerned with why the price is what it is. For technicians, the why portion of the equation is too broad and many times the fundamental reasons given are arbitrary. Technicians believe it is best to concentrate on what and never mind why.

Even though there are weaknesses in Dow theory, it will always be important to technical analysis. The ideas of trending markets and peak-and-trough analysis are found constantly within technical writings and ideas. Charles Dow and Dow theory helped investors improve their understanding of the markets so that they could maker better decisions in increasingly complex surroundings.