๐ Dow Theory Explained โ Part 2: Confirmations, Volume, and Trends
(A deep dive for serious traders)
In Part 1, we covered the basics of trend confirmation using the Dow Jones Industrial and Transportation Averages. Now letโs move deeper into the heart of Dow Theory by focusing on three powerful tools: Confirmation, Volume, and Phases of Trends.
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๐ 1. Confirmations: Why Two Indexes Matter
Dow Theory insists that a valid market signal must be confirmed by both the Industrial and Transportation averages.
For example: If the Industrials hit a new high, but the Transports don't, this may invalidate the trend.
Why? Because goods need to be produced and shipped. Both sectors must be healthy to reflect true economic growth.
This principle teaches traders a vital lesson: Donโt trust isolated signals.
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๐ 2. Volume: The Fuel Behind Price Moves
Charles Dow treated volume as a secondary but important indicator.
Hereโs how:
In an uptrend, volume should increase on rallies and decrease on pullbacks.
In a downtrend, volume should rise during sell-offs and drop during bounces.
When volume aligns with price action, it confirms the strength of the move.
๐ Example: A breakout on low volume is suspicious. A breakout with high volume? More likely legit.
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๐ 3. Market Phases: Accumulation, Public Participation, Distribution
Dow divided market moves into 3 phases:
1. Accumulation Phase
Smart money starts buying when the news is still negative.
Prices move slowly, with little attention from the public.
2. Public Participation Phase
News turns positive.
Volume picks up as the public joins in.
This phase shows strong, steady growth.
3. Distribution Phase
Smart money starts selling.
News is still good, but volume weakens.
Often marks the beginning of a reversal.
Understanding these phases helps you enter early and exit before the crowd.
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โ Final Thought
Dow Theory isnโt just about chartsโit's about market behavior. Itโs timeless because human psychology doesnโt change.
๐ข If this helped clarify Dow Theory, follow for more deep trading insights. A simple like helps this content reach others who need it.
๐ This is educational content, not financial advice. Trade wisely, and think for yourself.
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