What is Dow Theory and Why Do Traders Still Talk About It?

Key Takeaways: 

• Dow Theory breaks down the market into trends: primary, secondary, and minor. 

• It’s the foundation of technical analysis – timeless, not outdated. 

• It focuses on trend confirmation, volume, and market phases. 

• Helps traders avoid emotional trades by zooming out and thinking big-picture. 

• Works best for trend-followers and position traders looking for direction, not signals. 

Before there was technical analysis as we know it, there was Dow Theory – the OG of trend trading. 

Yes, it’s old... But just like vinyl records and black coffee, some classics don’t go out of style. 

Let’s cut through the fluff and break down why this theory is still a big deal for traders today. 

So, What is Dow Theory? 

The Dow Theory was developed by Charles Dow – yes, the same guy behind the Dow Jones Industrial Average. It’s all about identifying trends: primary, secondary, and minor – and figuring out when they start and end. 

According to Dow, the market moves like this: 

• Primary trend – the big move (can last months or years) 

• Secondary trend – a pullback or rally within the big move 

• Minor trend – the short-term noise 

Simple, right? It’s all about recognizing which trend you’re trading – and not fighting it. 

The 6 Basic Principles (Without the Boring Bits) 

1. The market discounts everything – All known info is already priced in. 
    

2. There are three types of trends – Long, medium, short. Know which one you’re in. 
    

3. Trends have three phases – Accumulation, participation, distribution. 
    

4. Averages must confirm – Dow believed in watching two indices (industrials + transport) move together. 
    

5. Volume confirms the trend – Higher volume = stronger conviction. 
    

6. A trend is in place until proven otherwise – Don’t call tops too early. 

Why It Still Matters 

Even if you’re trading on your phone with candlestick patterns and RSI overlays, Dow Theory lays the groundwork for understanding price action. 

Think of it like a mindset shift: 

• Don’t react to every wiggle on the chart. 

• Zoom out. 

• Trade with the tide, not against it. 

Pros & Cons 

FAQ: Dow Theory 

1. Is Dow Theory still relevant in today’s market? 
Yes. While the tools have evolved, the core idea of trading with the trend and confirming signals with volume remains as relevant as ever – especially for swing and long-term traders. 

2. Can Dow Theory be used for short-term trading? 
Technically yes, but it shines in larger time frames. If you’re a scalper or intraday trader, you might find it a bit too slow or broad for your needs. 

3. What are the “averages” Dow referred to? 
Dow believed that for a trend to be valid, both the industrial average and the transportation average had to move in the same direction. Today, traders often replace those with broader indices or correlated assets. 

4. How do I apply Dow Theory in real life? 
Start by identifying the primary trend. Then look for confirmation via volume and whether related markets are also trending the same way. Use that information to trade in the direction of strength. 

5. What’s the biggest mistake to avoid with Dow Theory? 
Trying to call reversals too early. Dow Theory teaches that a trend is in place until there’s clear evidence it’s reversed. Don’t try to be the hero that calls the top or bottom – follow the structure.