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Charles Dow and The Theory of Trends

Charles Henry Dow (1851-1902), born in Sterling, Connecticut, was a newspaper journalist during his whole life. In 1882, two years after moving to New York, Dow co-founded “DowJones&Company” with Edward Jones and Charles Bergstresser. The company’s offices were right next to the New York Stock Exchange. This location was important, because customers on the NYSE were ordering articles and information directly from Dow. And while other reporters were accessible to bribery in order to report more favorable news, Dow and Jones refused to participate in “manipulating” the market. That is why they decided to run their own company.
charles dow portrait
Dow also founded “The Wall Street Journal”. The first issue of the magazine appeared on July 8th 1889. A single copy cost 2 cents.

In 1884 Dow composed his first stock index in a bulletin for “Customers Afternoon Newsletter”. This first version of a stock index included only 11 stocks. The first version of the famous Dow Jones Industrial Average index appeared in The Wall Street Journal on May 26th 1896. It consisted of 12 stocks.

Charles Dow is considered the father of “The Dow Theory of Trends” which lays in the fundamentals of technical analysis nowadays. The most important postulate of the theory is that stock prices are not random or chaotic. They move in trends. Dow was the first to bring the idea of market psychology to the wider audience. Contrary to the popular belief that news and events determine the market, he stated that market trends are a phenomenon of human psychology, while news and economic reports are nothing more than noise in the system, which can affect the market only for a very short period of time.

Now let’s imagine how chaos would look like on the market. Chaos would mean that in one moment prices are in one place and in the next moment – in another, totally different.
Charles Dow Theory chaos
Looking at the picture above, it is impossible to track the price’s path or to predict its future direction. But if you connect the dots, things start looking a little different.
Charles Dow Theory order in chaos
You see that between every two dots there is a straight line, showing you the path. These straight lines represent the trends. As you can see, while the uptrend is in progress we can presume higher future prices. While the trend points down, lower prices should be expected. This is how Dow brought order into chaos.

Another thing Charles Dow noticed, is that no trend lasts forever. No matter how big, every trend eventually reverses. This reversal gives birth to a new trend in the opposite direction. Could these reversals be predicted? Yes, by knowing the phases of the trend and being able to identify which phase is currently developing. And that is where the Elliott Wave Principle comes on the stage.

Charles Dow portrait picture by: dynamichedge.com



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