The Dow Jones Theory and Other Things

by : martinchandra

Now that we have had a look at the argument against using some form of technical analysis to help gain an advantage in the market lets have a look on the bright side; the argument for using some form of analysis to help make buy and sell decisions in the market. I have two main arguments of why technical analysis works when applied correctly to trading any financial market and they are simple.

1. I know of many professional traders who consistently year after year make money in the market. There are also thousands of traders across the world who make a profit in the market consistently.

If it where not possible to make money trading because the markets are inherently random, then why do so many traders make money?

2. One of the main reasons I believe technical analysis works is because of the human element. When a market is in a raging bull market traders know this and can exploit it.

When a major support level is about to break there are normally thousand of traders with some technical training who are aware of this and exploit the situation.

Technical analysis is the science of human behavior. If you are in tune with the market sentiment then you can trade this knowledge effectively.

That is why technical analysis is not an exact science. It is an art. Regardless of the indicator you use what you are really studying is the science of human behavior.

Mr. Charles Dow and Edward Jones

Charles Dow was born 1851 and spent most of his adult life as a newspaperman. His particular area of expertise was reporting on the financial markets.

This eventually brought him to New York where in 1880 he found a job reporting on mining stocks. He was regarded not only as a financial reporter but also as a financial analyst. It was around this time he met up with Edward D. Jones and they moved on to form Dow Jones & Company.

The main business of the Dow Jones & Company was delivering financial information to those who needed it. The first news sheet of Dow Jones & Company was printed in 1883 and was the forerunner of what we now call "The Wall Street Journal". Dow then joined the New York Stock Exchange in 1885 where he remained a member until 1891.

All this is very interesting but why is it important. Well Mr. Dow is considered the father of modern technical analysis and his observations of the markets are considered some of the most important writings relating to technical analysis.