Dow Theory
Fixed income Corporate bond Government bond Municipal bond Bond valuation High-yield debt Stock Preferred stock Common stock Registered share Voting share Stock exchange Credit derivative Hybrid security Options Futures Forwards Swaps Commodity market Money market OTC market Real estate market Spot market Finance series Financial market Financial market participants Corporate finance Personal finance Public finance Banks and Banking Financial regulation Dow Theory is a heterodox theory on stock price movements that includes what is now called technical analysis as well as some portion of sector rotation. Following Dow s death, William Peter Hamilton, Robert Rhea and E.The theory was derived from 255 Wall Street Journal editorials written by Charles H. Alfred Cowles in a study in Econometrica in 1934 showed that trading based upon the editorial advice would have resulted in earning less than a buy-and-hold strategy using a well diversified portfolio.
Cowles concluded that a buy-and-hold strategy produced 15.5% annualized returns from 1902-1929 while the Dow Theory strategy produced annualized returns of 12%. Nevertheless, adjusting returns for risk is controversial in the context of the Dow Theory.
William Goetzmann, Stephen Brown, and Alok Kumar believe that Cowles study was incomplete Specifically, the return of a buy-and-hold strategy was higher than that of a Dow Theory portfolio by 2%, but the riskiness and volatility of the Dow Theory portfolio was lower, so that the Dow Theory portfolio produced higher risk-adjusted returns according to their study. George Schaefer organized and collectively represented Dow Theory, based on Dow s editorials.
One key problem with any analysis of Dow Theory is that the editorials of Charles Dow did not contain explicitly defined investing rules so some assumptions and interpretations are necessary. Many technical analysts consider Dow Theory s definition of a trend and its insistence on studying price action as the main premises of modern technical analysis. Classic Books on Dow Theory Stock · Common stock · Preferred stock · Outstanding stock · Treasury stock · Authorised stock · Restricted stock · Concentrated stock · Golden share . After numerous studies supported Cowles over the following years, many academics stopped studying Dow Theory believing Cowles s results were conclusive. In recent years however, Cowles conclusions have been revisited.
Dow himself never used the term Dow Theory, nor presented it as a trading system. The six basic tenets of Dow Theory as summarized by Hamilton, Rhea, and Schaefer are described below. There is little academic support for the profitability of the Dow Theory. Dow (1851–1902), journalist, founder and first editor of the Wall Street Journal and co-founder of Dow Jones and Company.
