Dow Theory Flashcards
1.Describe the history of Dow Theory 2. Discuss the basic principles of Dow Theory 3. Identify the 3 basic types of trends identified in Dow Theory as defined by time: primary, secondary, minor 4. Identify the three basic trend patterns of all prices: upward, downward, and sideways 5. Describe the ideal market picture according to Dow theory 6. Express the concept of confirmation in Dow theory 7. Explain the role of volume in Dow theory
Who was Charles H Dow
Born on 1850 and died in December of 1902, He was The founder of the Dow Jones financial news service in New York and founder and first editor of the Wall Street Journal.
He’s the father of modern technical analysis first to create an index that measures the overall price movement of US stocks he never specifically formulated what became known as the Dow theory
Dow theory was first used by Dow’s friend a A. C . Nelson. who wrote in 1902 an analysis of Dow’s Wall St. Journal editorials called the ABC of Stock Speculation.
Who was William Peter Hamilton
William Peter Hamilton succeeded Charles Dow as editor of the Wall Street Journal. From 1902-1929 Hamilton continued writing Wall Street Journal editorial is using the tenants of Dow theory
He also describe the basic elements of this theory in his book “the stock market barometer” in 1922
Who was Alfred Cowles III
In 1937 he performed the first formal test of the profitability of trading using the tenants of Dow theory in 1934
He found that a portfolio based on Hamilton’s theory lack the return on a portfolio fully invested in a market index that Cowles had developed. Therefore determining that Hamilton could not outperform the market and concluded that Dow theory of market timing results in returns that lag the market
Cowles study, considered a seminal peace in the statistical testing of market timing strategies, provided a foundation for the random walk hypothesis and the efficient markets hypothesis
Wha did Brown, Goetzman, and kumar demonstrate in the journal of finance in 1998
Hamilton’s timing strategies yield high Sharpe ratios and positive alphas for the period 1902-1929, thus Hamilton could time the market very well using Dow theory… His methods worked especially well in sharp market declined and considerably reduced volatility
Robert Rhea further refined what became known as Dow Theory. His book The Dow Theory: An Explanation of the Development and an Attempt to Define his Usefulness as an Aid to Speculation..Describing Dow Theory in detail, and formalized the tenents into a series of hypothoeses which are:
- The primary trend is inviolate
- The averages discount everything
- Dow Theory is not infalliable
