John Murphy Book Series – Article 2 of 10

📘 Dow Theory – The Foundation of Technical Analysis

From: Technical Analysis of the Financial Markets

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🧠 What Is Dow Theory?

Dow Theory is the foundation of modern technical analysis, created by Charles Dow—founder of the Dow Jones Index and The Wall Street Journal.

John Murphy dedicates an entire chapter to it, as it explains how and why markets move.

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🧩 Key Principles of Dow Theory:

1️⃣ Markets move in three trends:

Primary trend (long-term)

Secondary trend (corrections)

Minor trend (short-term fluctuations)

2️⃣ Primary trends have three phases:

Accumulation (smart money buying)

Public participation

Distribution (smart money selling)

3️⃣ Indexes must confirm each other:

If the Dow Industrials rise, the Dow Transports must confirm—otherwise, the trend is questionable.

4️⃣ Volume must confirm the trend:

Rising prices with increasing volume = strong trend. Falling volume = weakening trend.

5️⃣ Trends remain in effect until a clear reversal signal appears.

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✅ Why It Matters

Murphy considers Dow Theory the backbone of technical thinking. Without it, tools and patterns lose meaning—it sets the rules for reading market structure.

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