I should back up here slightly and mention that in 1884 Dow published his first stock market average of 11 stocks. From the original 11 stocks there were some changes and rearrangements of the average until finally in 1928 he settled on 30 stocks which are now know as the industrial average and that’s where we get the term the’ Dow Jones Industrial Average’.
In spite of having its unique language, the stock market isn’t as mysterious as some investment professionals would have you believe. Understanding how the stock market functions does involve some research. However, there are a few basic concepts that can help demystify the stock market. The first conception is to reflect on the stock market like a bank: The people who’re making loans, however, are shareholders rather than loan officers. The more people buy of a single stock, the more money the firm has to keep the company running. The second concept is that of offer and demand: The larger the amount of shares, the lower the price of the shares. On the other end of that equation, the fewer the available shares, the higher the price. While this may seem like an overly simplistic view on a market that’s a long-lasting impact on our personal fortunes, our economy and even our housing market, this is genuinely how the stock market works.
The three trend where a primary, secondary and minor trends. Now this is important, as later on as we discuss this it will have a major roll in our analysis.
The primary trend is the main force behind the trend and, it’s like a river flowing in a particular direction. The secondary trend is like tributary to the main trend. It may diverge for a time but finally it will come back in accordance with the main river. The minor trend, it’s like a small stream. This runs this way and that but is headed, in the general direction of the river.
FAQ’s: Is this trading volume normal?The Dow Jones trading volume today is 144.18 Million which is about 100 times less than the trading volume in the past few years. Is this low volume due to the snow storm today or it has been like this since the financial meltdown?
It's not 100 times less than a few years ago (not even close). http://www.marketwatch.com/investing/index/DJIA/charts?countryCode=US&submitted=true&intflavor=advanced&origurl=%2Ftools%2Fquotes%2Fintchart.asp&time=12&freq=1&comp=Enter%20Symbol%28s%29%3A&compidx=aaaaa~0&compind=aaaaa~0&uf=7168&ma=1&maval=50&lf=1&lf2=4&lf3=0&type=2&size=1&optstyle=1013 Just check the volume below the chart and you will see you are wrong
Volume really slowed down around the holidays. But is starting to pick backup. http://pincherplay.com
The primary trend may take years to reach an end and develops over time. The secondary trend can take anywhere from a couple of weeks to a couple of months in duration and the minor trend may be found in the opposite direction of the primary trend. Minor trends such as daily trend last a couple of days or so and are of little significance.
Let’s Continue This Analysis
In addition to the three types of trends, Dow then went on to further qualify the trend by stating that the trend has three phases. An accumulation stage, the public participation stage and finally the distribution stage.
As the original Dow average was made up of shares from different sectors the next part of the Dow theory was that the average of the various sectors must confirm each other.
Dow also considered the impact of volume on a trend. He stated that volume should expand during the same direction of the trend.
The last important part of the theory is the trend should be assumed to still be in place until there is a definite sign that the direction has in fact changed.
My interpretation of the Dow theory above is very brief because it is to delve to deeply into any one particular subject. It is likewise not necessary for what I am trying to reach and that is to offer you a broad idea of the way the markets work and some way to trade them.
The main point I want you to get away from the Dow theory is that there’s three types of trends, a secondary trend, a primary trend, and minor trends. We can use this in our approach.