Dow and Main Market Principles
Tags: Trade, Market Principles, Investment, Stock Market Strategy, Dow Jones

Before giving the start: Lets make it clear. Anything I have written or suggested here are not any kind of financial advice, and by just reading the below article please do not invest or trade anything.

Everyone and I literally mean everyone has heard of Dow Jones Industrial Average, or let me rephrase it; everyone has heard of DIJA somewhere along his or her journey through “Trade-Investment”. So, what is or who is Dow Jones?

Dow Jones & Company was founded in 1882. Founding Fathers, Charles Dow and Edward Jones together with Charles Bergstresser

Dow Jones & Company was founded in 1882. Founding Fathers, Charles Dow and Edward Jones together with Charles Bergstresser changed our idea of the market and its behavior completely through what we will call principles for the sake of this article.

Lets begin where it actually started… Charles Dow was actually a journalist with a unique ability to explain complex financial structures to us basic Joes. He indeed believed in simplicity.

Back in 1880s decision process regarding investments were radically different from what we now do today, but what counts more is; it was radically different from what Dow suggested, and marketed. To put it in perspective; only a lucky few got a chance to learn the financial ratios of a company that he or she was investing in.

The game plan changed when Charles Dow, Edward Jones and Charles Bergstresser decided to publish “The Wall Street Journal”. Which is still the world’s most influential publication in the world of finance. Publishing “The Wall Street Journal” was not the only thing they actually accomplished. Dow Jones & Company put together several industrial-based stocks in an index and reported an average. The principle was simple; if the index goes up thus the individual stocks on average.

Dow also believed in the ability of predicting stock market movements based on price movements of different stocks. Lets rephrase it in everyday language: if industrial stocks start to rise in price, we should also be expecting a rise in transportation stocks; as it is rather a chain than individual items.

Till now we have talked primary school history. So, now we will look through main market principles Dow put together back in 1880s and how we still can make sense of those principles in our 2020s trades and investments.

1. Market Discounts Everything

Price is everything. You can literally find all the details you need in the price, regarding the instrument.

Keep this in mind if you are not a behavioral economist. If so, we will discuss that further down the line.

2. Market Trends Exist in 3 Forms

A market can have a primary trend, a secondary trend and a minor trend. Get this, these trends may be in opposition with each other. Lets explain it further: A primary trend can be bullish or bearish, simply put the price can be going up or down routinely, during a time span of 1 year, 6 months; here time span is associated with the instrument and its properties. During this trend if we study further time frames we may encounter a different secondary trend. Lets say a primary bullish trend that has been going on for the last 6 months is showing a secondary trend that is what we usually call a pullback for 2 weeks. And even during that pullback that lasted for 2 weeks, we may see an opposite move in the price that only lasts for may be a few days.

3. Primary Trends Consist of 3 Phases

This one is pretty simple actually, remember we talked just now about how a price can be having a primary trend but within that primary trend we may see a secondary one and/or a minor trend, well lets now talk game plan in primary trends.

What happens is, we humans are lovers of repetition. In a bull market we will experience accumulation, move phase and excess phase; in a bear market we will be experiencing a distribution phase, move phase and a panic phase.

Imagine a price that has been long sitting on a range with literally no wind, little action and along the line you start seeing a few moves a few spikes as the price is really a bargain and people start to see it, the “Buy”s. start, one after the other and price starts to gradually go up, now literally everyone has heard of the instrument and the amount of money it has made someone’s neighbor, friend, teacher, cashier etc.

“If the shoe shine boys are buying stocks, who else is left?” J.P. Morgan

Thus comes a point now where the price can no longer go, everyone has bought it at some point and now starts to look for a new buyer to sell; guess what!!! Now starts the distribution phase, as more and more people start to sell or short their risks/positions thus begins the panic and to a point where the instrument is now a great bargain once again, here starts the movement once again.

4. Indeces Cannot be Saying Different Things

I admit, I could have given a bit more thought on the tittle but you get the point right? Market indicators, market averages, indices should all be saying the same thing regarding the instrument. If one index states rising prices and others don’t, well sorry to break your heart but most probably it is not an uptrend.

5. Volume Should be Confirming the Trend

Here things get a bit tricky. To start with I would like to emphasize the part where I suggested different instruments can have different properties, well crypto currencies; basically bitcoin and the rest do have a different set of rules they like to play by so when considering volume being in conformity with the trend lets keep that in mind and not fall pray to fake breakouts etc.

Apart from that what Dow states here is the volume should be increasing if the move is in the same way with the trend and should be decreasing vise versa. Here as a quick suggestion looking at the “Average volume” might make more sense when trying to understand whether volume is increasing or not.

6. A Trend is Infinite as Long as a Clear Reversal is Seen

Well infinite is a bit exaggerated, we should ease it up by suggesting a trend continues as long as a clear reversal occurs. As humans we tend to feel things. During our investments or trades we are either hopefull or full of fear. This means we try to see things that are not there. I more than once made the mistake of not trusting my analysis, simply because I felt like I would be missing out on the opportunity or would suffer losses I am not ready to tolerate just quite yet. Usually during the reversals there comes a time when you are way too bullish than you should be for your sake or again vise versa.

A trend continues as long as a clear reversal occurs

Reversals are hard to spot, if you are looking for a primary trend reversal good luck, you do have a risk of mixing it up with a secondary trend that is in the opposite direction and for now works in your favor. Here comes the phenomena stated above, being way too hopeful when caution would be much more helpful.

So what is a reversal; basically put Dow explains it as such: If you keep seeing lower lows and lower highs, well my friend the way is still down, vise versa if you keep seeing higher highs and higher lows we are still going up. Till just at one moment when we no longer see a new lower low and lower highs stop declining, vise versa when we no longer see a new higher high and higher lows stops inclining. A brief explanation regarding higher highs, higher lows & lower highs and lower lows: A higher high is the point of price that is higher than the previous peak, as higher low is the low point of price that is higher than the previous low. A Lower low is a low point of price that is lower than the previous low; as a lower high is the high point of price that is lower than the previous high point.

We have now concluded the brief explanation of Dow principles and Dow Jones & Company briefly. What I admire the most about these principles is how they still are applicable more or less in any instrument.

During analysis what I try to do is keep it simple and first try to understand whether the trend is going up or down or not going anywhere at all, after that I start looking for an entry point and a safe harbor. Here I keep reminding myself of these 6 principles to make sure I am not excessively hopeful or an unnecessary coward.