🔰 Explanation of John Murphy's Book – Article 2 of 10
📘 Dow Theory – The First Foundation of Technical Analysis
From the Book: Technical Analysis of the Financial Markets
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🧠 What is Dow Theory?
Dow Theory is the cornerstone of modern technical analysis, established by Charles Dow, the founder of the Dow Jones Index and The Wall Street Journal.
John Murphy dedicated an entire chapter to it because it explains how markets move and why.
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🧩 The Basic Principles of Dow Theory:
1️⃣ The market moves in three directions:
Main trend (long-term)
Secondary trend (corrective)
Minor trend (daily or hourly)
2️⃣ The main trend has three phases:
Accumulation phase (smart buying)
Public participation phase (everyone joins in)
Distribution phase (professional selling)
3️⃣ Indicators confirm each other:
If the Dow Industrial Average rises, it should be confirmed by the Transportation Index (Dow Transport), otherwise the trend is not confirmed.
4️⃣ Volume confirms the direction:
A strong upward trend is accompanied by an increase in volume, and vice versa.
5️⃣ The trend continues until reversal signals appear.
John Murphy considers Dow Theory to be the foundation upon which all technical analysis tools are built. Without understanding it, it is difficult to interpret market behavior or develop effective strategies.
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🔍 This is an educational review, not a trading recommendation. Stay aware and think before making any decision.
