Charles Henry Dow, was born in Sterling, Connecticut on November 5, 1851. He was the son of a farmer, but knew early on, he did not want to be involved in that profession. Dow decided to try journalism for a while. During this time, he became quite interested in Wall Street.
In 1882, Dow teamed with Edward Jones, and they started their own agency, Dow Jones & Company. The team realized Wall Street needed another financial news bureau. This new bureau believed in honesty, and refused to manipulate the stock market. Ultimately, in 1889, the partners gave birth to “The Wall Street Journal”. The Journal became one of the most respected financial publications in the world.
In 1896, through extensive research into market movements, Dow devised what would be called, “The Dow Jones Industrial Average”. The DJIA tracked the closing prices of twelve companies. The number for the average was figured out by adding up the closing prices of the twelve stocks, and then dividing that number by twelve. The first DJIA result appeared in the Wall Street Journal in May of 1896. In 1897, an average was also created for railroad stocks.
Dow developed a series of principles for understanding and analyzing stock market behavior. This became known as the “Dow Theory”. It consisted of six basic tenets which included, the market discounts everything, the market has 3 trends, there are 3 phases of primary trends, the market indexes must confirm each other, volume must confirm the trend, and the trend remains in effect until a clearly defined reversal occurs. This theory layed the groundwork for what is now called technical analysis.
I have meticulously studied the Dow Theory, and considering it is over 100 years old, I find it astonishing. Dow was truly a pioneer in his efforts to understand how the stock market really worked. Technical analysis is a major component of my overall trading plan. This includes the stock market and the futures market. I recommend reading the complete Dow Theory. Much of it can be applied to the markets of today.
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