What is the Dow Theory?

The Dow Theory is a financial framework modeled on the ideas
of Charles Dow. Dow founded the Wall Street Journal and helped
create the first US stock indices, known as the Dow Jones
Transportation Average (DJTA) and Dow Jones Industrial Average
(DJIA).
Though the Dow Theory was never formalized by Dow himself, it
can be seen as an aggregation of the market principles presented
in his writings. Here are some of the key takeaways:
• Everything is priced in — Dow was a proponent of the efficient
market hypothesis (EMH), the idea that markets reflect all of
the available information on the price of their assets.
• Market trends — Dow is often credited with the very notion of
market trends as we know them today, distinguishing between
primary, secondary, and tertiary trends.
• The phases of a primary trend — in primary trends, Dow identifies
three phases: accumulation, public participation, and excess &
distribution.
• Cross-index correlation — Dow believed that a trend in one
index couldn’t be confirmed unless it was observable in another
index.
• The importance of volume — a trend must also be confirmed by
high trading volume.
• Trends are valid until reversal — if a trend is confirmed, it
continues until a definite reversal occurs.
It’s worth remembering that this isn’t an exact science — it’s a
theory, and it might not hold true. Still, it’s a theory that remains
hugely influential, and many traders and investors consider it an
integral part of their methodology.