Dow Theory Introduction of the four Dow Theory s Defects Money Tips

Category: Money tips Release Date: 2007-06-10

Dow Theory's Defects

Readers might think that the contents of the previous section involved lengthy troublesome, at this point, some readers may think that Dow Theory incredible. Others will pay more attention to their practical application in certain deficiencies in the same time, also raised a number of objections.

Thus, more charts discussed before, we had better use a portion of the text to make a note of this.

First, we look at the Dow Theory, when dealt with the authors often use a "second guess", which is a theorist as long as the Dow at a critical moment, they produce opinions had been divided, they will often continue to produce accusations (Unfortunately, it often is). Even the most experienced, the most careful Dow Theory analysts have believed that in a series of speculative market behavior can not support their position, there is a need to change his views. They do not deny this - but they believe that in a long-term trend, so a temporary measure due to the loss is minimal. Many Dow theorists, their views will be published regularly come out to help traders before and after the transaction and the transaction when a reference in the previous chapter, if the readers pay attention to such a record, you will find a description given at the time, that is, was recognized in advance by Dow analysts made.

"Signal too late" criticism. This is the more obvious deficiencies. Sometimes this is not restrained by the comments, "Dow Theory is an extremely reliable system, because it convinces the major trends in each trader to miss third phase of pre-and post-third stage, sometimes Nor is there any middle of the third phase. "or simply to give a typical example: in 1942 a major bull market started as an industrial index of 92.92 to 212.5 the end of 1946, a total rise of 119.58 point, but a rigorous theorists do not wait until the Dow industrial average rose to 125.88 will not buy, and also must wait until the price fell to 191.04 only when thrown, so not too much 65 most profitable point or not more than half of the total, the typical examples irrefutable. But usually the answer to this objection is: "to find out if a dealer, he was 92.92 (or away from this level within five points) for the first time to buy, and then in the whole round of the bull market has been held for several years 100% of the position and, ultimately, 212.50, sell, or within five points away from this level, "the reader can try; in fact, he will find it is hard even to find a beat, they do like Dow Theory, as well.

To date insofar as it covers each of the past 60 years, a bull and bear all of the disaster, a better answer is that a detailed study over the past six decades in the transaction records. We are fortunate to obtain the consent of Mr. Charles Dalton of its calculation results reproduced below. In theory, this calculation results can show that such a situation. A sum of only 100 dollars of investment in the July 12, 1897 put into the Dow Jones Industrial Average of stocks, at a time when a bull market in Dow Theory for the emergence of these shares will be in, and only in the proof of confirmed Dow Theory the main trends in a turnaround will only be sold or re-buy.

1. Dow Theory sixty transaction record (omitted)

In short, in 1897 to 100 U.S. dollars invested in 1956 becomes a 11,236.65 U.S. dollars. Investors, as long as the Dow theory, declaring the start of a bull market to buy industrial average stocks in the bear market came when thrown on it. During this period, investors need to do 15 times to buy, 15 times to sell, or deal once every two years, according to the changes in index.

The record is not perfect. There is a deal mistakes, there are three further inputs should have a higher level than the above-mentioned liquidation carried out. But here, we almost do not need any defense. At the same time, the record does not take commission and taxes, but also did not include an investor holdings during this period received a dividend; Needless to say, the latter will increase the number of funds.

For those who believe in "Just buy good stocks, and then to sleep," the principle of beginners, the light of the above records, in the fifty years which, he had only an opportunity to buy, that is, the industrial index to the lowest point the same, only an opportunity to throw holdings, that is, the highest index points. That is, August 10, 1896 reached the lowest point of 29.64, the 100 U.S. dollars of investment to the highest point of this period, that is, 60 years later, April 6, 1956 of 521.05, only added to the 1757.93 yuan, which is to follow Tao's rules, a far cry from the results of 11,236.65 yuan.

2. Dow Theory is not an error

This is a matter of course, its reliability depends on their understanding and explanation. However, the re-emphasize that the above-mentioned record speaks for itself a problem.

3. Dow Theory doubts often make investors uncertain

Sometimes this is possible, but not always the case. Dow Theory on the issue of the direction of the major trends always gives a forecast, and this prediction in the new beginning of the main trends in the short term may not be clear and correct. Sometimes, a good analyst Dow will say: "The main trend is still bullish, but at a dangerous level, so I do not know whether to recommend that you buy. Now it may be too late."

However, this objection is often merely a reflection of the critics, it is hard to accept the "stock price index inclusive of all the information and data," the basic concept. For the "do what the stock," this issue, Dow Theory principles are often associated with other ways not consistent with the findings, which he pairs of Dow Theory are suspect, but there is no doubt that Dow Theory is often closer to the facts.

This comment also reflects on the other hand, a hasty mental. Dow Theory can not be "explain" stage may last several weeks or several months (for example: a straight-line formation phase), active traders tend to instinctively make decisions contrary to the Dow Theory, but in the stock market Like with other cases, patience is also a virtue - in fact, if you want to avoid serious mistakes, it is necessary.

4. Dow Theory on the interim little to help

Entirely correct. Dow Theory for the medium-term trend shows little change in any signal. However, if selecting the right stock to buy, then the trader can profit only from the main trend has quite good. Some traders in the Dow based on the theory of summing up some additional rules, applied to the medium term, but the result was unsatisfactory. The remaining chapters of this book will be dedicated to elaborate on some better means to solve this problem.

5. Index can not be the sale of

This is also entirely correct, Dow theory, only in a technical way of direction toward the main trends, which is crucial, as we mentioned at the beginning of this chapter, the majority of a stock movement in line with the main trends. Dow Theory does not and can not tell you what to buy the stock. This is why we want to set out later in one of the issues.