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Jim Rohn

 

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Forex: The Dow Theory

The Dow Theory is at once the most celebrated, complicated, and least-understood interpretation of market action, probably because neither Charles Dow, who founded the Dow Jones Company, nor any of his various disciples has ever defined the theory precisely.

In essence, the Dow theorists hold that there is a primary movement in the market at all times--- a kind of basic tidal action. Then there's a secondary movement which might be likened to waves. And finally, there are the ripples on the surface that represent the daily movement of prices. They contend that it is possible to tell when either the primary or secondary direction changes by comparing the actions of the industrial and rail averages--- Dow Jones Averages, of course.

When both of them move in the same direction for a given period of time, either notably up or down, they are supposed to indicate a significant change in the direction of the market which will hold good until the two averages 'confirm' each other again in an opposite direction. This is what the erudite market experts are talking about when the say 'the rails confirmed the industrials'--- or when they worry publicly about the failure of one to confirm the other.

Dow theorists contend that by their somewhat nebulous formula, the have been able to forecast every significant movement in the market for many years. Other analysts, looking at the same set of facts, dispute the Dow Theory's record. They say it can only be made to look good when the forecasting has become history. Nevertheless, many financial editors continue to expound the Dow Theory and various Dow disciples appear in the advertising columns from time to time, offering a letter service, usually short-lived--- to explain the market action in Dow terms.

Every often in the reading of his newspaper, the new investor will encounter what appears to be a striking contradiction between the news and the market reaction to that news.

There is one simple explanation for such paradoxes: say, the stock market has 'discounted' the news. The big traders, the people supposedly in the know, were sure that a special dividend was coming, because the company's profits had been increasing spectacularly. They had already bought or sold in expectation of these developments, and when the actual news breaks attracted public interest in the market, the professionals seized their opportunity to realize profits--- to sell when others bought.

Some people consider the market an infallible barometer of general business.