[Summary]
The Dow Theory is a classic way of determining trends.
What is most likely to fail with Dow Theory is not the lack of knowledge itself, but the fact that you end up justifying your hasty decisions afterwards.
In actual investment, we start by looking at the high and low prices, rounding up and down. However, we cannot overlook the fact that it is easy to try to explain even short-term noise with theory.
In this article, we will organize the Dow Theory not as "knowledge" but as a procedure to check before buying or selling. Don't rush to conclusions, read according to your financial amount and time horizon.
The first thing to differentiate according to Dow Theory
When looking at the Dow Theory, first determine what you want to judge. The information you need will change depending on whether you want to know the meaning, confirm before buying or selling, or review your current holdings.
Especially for beginners in investing, the easier the words are, the more they tend to take them as a conclusion. The Dow Theory alone cannot be used as a basis for making decisions. If you want to check it, it is more realistic to look at it in conjunction with fund management, holding period, and opposing materials.
Situations where Dow Theory is likely to fail
If we look at the Dow Theory as a pattern of failure, we must first make narrow assumptions. It is important not to mix up whether you are talking about the market as a whole, individual stocks, NISA or long-term funds.
Checking the following points will make things a lot easier.
| Axis to check | What we see with Dow Theory |
|---|---|
| purpose | What do you use to judge? |
| Time axis | Which is closer to short-term trading, long-term holding, or NISA? |
| basis | Which one is more important: price, business performance, interest rates, exchange rates, or psychology? |
| risk | When things go the other way, where should you look again? |
| action | Will it lead to buying, selling, or doing nothing? |
Points that can easily cause trouble in making decisions
Dow Theory doesn't only stumble when you don't have enough knowledge. In fact, there are situations where we interpret something conveniently because we know a little bit about it.
- Don't decide whether to buy or sell the moment you see the Dow Theory
- Do not mix the time frame that fits the Dow Theory with your own holding period.
- Don't increase your position to recoup your losses
- Don't make a decision just based on SNS or rankings.
The important thing here is not to settle on one correct answer based solely on Dow theory. In investment, the meaning of the same material changes depending on the market, holding period, and amount of funds. When in doubt, prioritize confirmation over conclusion.
Checklist before buying and selling
Before using the Dow Theory as a basis for making an actual decision, check at least these five things.
- Can you explain in one sentence the purpose of watching Dow Theory?
- Have you confirmed one or more countermeasures or failure conditions?
- Are you investing your living funds or money that will be used soon?
- Have you decided in advance the criteria for cutting losses, taking profits, and continuing to hold stocks?
- Are you making judgments based only on social media or short headlines?
Checklists are simple, but they prevent you from adding reasons after making a decision. The purpose of confirming the Dow Theory is not to act faster, but to reduce unnecessary errors in judgment.
Summary
The Dow Theory is a material for organizing investment decisions. Even if you read it as a failure pattern, treating it as a standalone buy/sell signal will lead to poor judgment.
The points to keep in mind are as follows.
- Decide first the purpose of looking at Dow Theory
- Do not mix time axis and amount of funds
- Check not only good materials but also negative materials
- When using NISA and long-term funds, consider how to handle losses
- When in doubt, reduce your position or postpone it.
The more knowledge you have, the safer it seems, but in the market it can become dangerous if you use it incorrectly. It is realistic to treat the Dow Theory as a tool to pause before buying or selling, rather than as a word to rush into judgment.