The Daw Theory [Part One]

1 October 2016, 09:56
Muhammad Elbermawi

Who is Charles Dow?

"Charles H. Dow was the founder of the Dow-Jones financial news service in New York, and founder and first editor of the Wall Street Journal. He died in December, 1902, in his fifty-second year. He was an experienced newspaper reporter,


Charles Dow, the father (granddaddy) of modern technical analysis, was the first to create an index to try to measure the overall price movement of U.S. stocks.


However, he never specifically formulated what has become known as the Dow Theory. He wrote editorials about what he had learned in his experience as a reporter and advisor on Wall Street but never organized these individual pieces into a coherent theory. In fact, he only wrote for five years before his sudden death in 1902.


The term "Dow's Theory" was first used by Dow's friend, A. C. Nelson,


After Dow's death, William Peter Hamilton succeeded him as editor of the Wall Street Journal. For over a quarter of a century, from 1902 until his death in 1929, Hamilton continued writing Wall Street Journal editorials using the tenets of Dow Theory. Hamilton also described the basic elements of this theory in his book, The Stock Market Barometer, in 1922.


After Hamilton's death, Robert Rhea further refined what had become known as Dow Theory. In 1932, Rhea wrote a book called The Dow Theory: An Explanation of Its Development and an Attempt to Define Its Usefulness as an Aid to Speculation. In this book, Rhea described Dow Theory in detail, using the articles by Hamilton, and formalized the tenets into a series of hypotheses and theorems that are outlined next.


Rhea presented three hypotheses:


1. The primary trend is inviolate.

2. The averages discount everything.

3. Dow Theory is not infallible.

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