The document explores the foundations of technical analysis and the Dow Theory, emphasizing the contributions of Charles H. Dow and Edward Jones, who established the Dow Jones Industrial Average. It outlines the six basic tenets of the Dow Theory crucial for traders, highlighting the distinctions between technical and fundamental analysis in investment strategies. Ultimately, it aims to enhance understanding of market behavior and improve trading decisions through informed analysis.

1. The Responsible Trader Lessons
The Responsible Traders - POV
Module 1 – Technical Analysis and the Dow Theory
The Responsible Trader Lessons

2. The Responsible Trader Lessons
The Responsible Trader’s - POV
• The Responsible Trader's POV (Point of View).
• These are my notes, my own additional research and studies on the
Topic that I posted, and my personal observations and opinions that I
am sharing to further enhance our knowledge and understanding.
• Some of these were previously posted on “The Responsible Trader”
thread, Stock Market Pilipinas (www.stockmarketpilipinas.com). This
is the latest version of previous posts I made.
• Some of these plus further explanations and discussions will be
appearing in my forthcoming book “The Responsible Trader.”
The Responsible Trader Lessons

3. The Responsible Trader Lessons
Technical Analysis and the Dow Theory
The Responsible Trader Lessons
The Dow Theory
Dow imagesource: http://www.enational.ro/dosarele-enational/dow-jones-cel-mai-important-indice-bursier-65340.html/
• My research on the origins of technical analysis eventually led
me to the Dow theory. This theory is the foundation of much
of what we know today as technical analysis.

4. The Responsible Trader Lessons
Dow&Jones imagesource: http://www.enational.ro/dosarele-enational/dow-jones-cel-mai-important-indice-bursier-65340.html/
The Responsible Trader Lessons
Charles Dow and Edward Jones
• Technical analysis started with the work of Charles H. Dow, who
teamed with Edward Jones, and both are still remembered
today in the name of the leading stock market index, the Dow
Jones Industrial Average (DJIA).

5. The Responsible Trader Lessons
The Dow Theory
• Both founded Dow Jones & Co., in 1882, a news agency in an obscure Wall Street
basement. They started by distributing a small handwritten newsletter to banks
and brokerages called the Customer’s Afternoon Letter.
• The newsletter later on became the Wall Street Journal in 1889, and Dow
continued as its editor.
• Dow theory was formulated from a series of Wall Street Journal editorials
authored by Charles H. Dow from 1900 until the time of his death in 1902.
• These editorials reflected Dow's beliefs on how the stock market behaved and
how the market could be used to measure the health of the business
environment.
The Responsible Trader Lessons

6. The Responsible Trader Lessons
The Dow Theory
• Dow was not able to publish his complete theory on the markets
because of his death.
• Several followers and associates have published works that have
expanded on the editorials. Some of the most important
contributions to Dow theory were:
• William P. Hamilton's "The Stock Market Barometer" (1922),
• Robert Rhea's "The Dow Theory" (1932),
• E. George Schaefer's "How I Helped More Than 10,000 Investors To
Profit In Stocks" (1960) and
• Richard Russell's "The Dow Theory Today" (1961).
The Responsible Trader Lessons

7. The Responsible Trader Lessons
The Dow Theory
Much of what we call today as technical analysis has its roots in Dow's
work. For this reason, all traders using technical analysis should get to
know the six basic tenets of the Dow theory.
1. The Averages Discount Everything
2. The market Has Three Trends
3. Major Trends Have Three Phases
4. The Averages Must Confirm Each Other
5. Volume Must Confirm the Trend
6. A Trend Is Assumed to Be in Effect Until It Gives Definite Signals
The Responsible Trader Lessons
That It Has Reversed
Source: Murphy, John. Technical Analysis of the Financial Markets; (c) 1999.

8. The Responsible Trader Lessons
The Dow Theory
Much of what we call today as technical analysis has its roots in Dow's
work. For this reason, all traders using technical analysis should get to
know the six basic tenets of the Dow theory.
1. The Averages Discount Everything
2. The market Has Three Trends
3. Major Trends Have Three Phases
4. The Averages Must Confirm Each Other
5. Volume Must Confirm the Trend
6. A Trend Is Assumed to Be in Effect Until It Gives Definite Signals
The Responsible Trader Lessons
That It Has Reversed
Source: Murphy, John. Technical Analysis of the Financial Markets; (c) 1999.

9. The Responsible Trader Lessons
The Responsible Trader Lessons
Technical Analysis – The Six Tenets
2. The Market Has Three Trends - Uptrend
Dow defined an uptrend as a situation in which each successive rally closes higher than the previous
rally high, and each successive rally low also closes higher than the previous rally low. In other words,
an uptrend has a pattern of rising peaks and troughs

10. The Responsible Trader Lessons
The Responsible Trader Lessons
Technical Analysis – The Six Tenets
2. The Market has Three Trends - Downtrend
The opposite situation, with successively lower peaks and troughs, defines a downtrend. Dow's
definition has withstood the test of time and still forms the cornerstone of trend analysis.

11. The Responsible Trader Lessons
The Responsible Trader Lessons
Technical Analysis – The Six Tenets
2. The Market has Three Trends -Sideways or Flat Trend
This is a sideways or flat trend with the Highs and the Lows on the Same Level with each other.

12. The Responsible Trader Lessons
The Dow Theory
Much of what we call today as technical analysis has its roots in Dow's
work. For this reason, all traders using technical analysis should get to
know the six basic tenets of the Dow theory.
1. The Averages Discount Everything
2. The market Has Three Trends
3. Major Trends Have Three Phases
4. The Averages Must Confirm Each Other
5. Volume Must Confirm the Trend
6. A Trend Is Assumed to Be in Effect Until It Gives Definite Signals
The Responsible Trader Lessons
That It Has Reversed
Source: Murphy, John. Technical Analysis of the Financial Markets; (c) 1999.

13. The Responsible Trader Lessons
The Dow Theory
Much of what we call today as technical analysis has its roots in Dow's
work. For this reason, all traders using technical analysis should get to
know the six basic tenets of the Dow theory.
1. The Averages Discount Everything
2. The market Has Three Trends
3. Major Trends Have Three Phases
4. The Averages Must Confirm Each Other
5. Volume Must Confirm the Trend
6. A Trend Is Assumed to Be in Effect Until It Gives Definite Signals
The Responsible Trader Lessons
That It Has Reversed
Source: Murphy, John. Technical Analysis of the Financial Markets; (c) 1999.

14. The Responsible Trader Lessons
The Dow Theory
Much of what we call today as technical analysis has its roots in Dow's
work. For this reason, all traders using technical analysis should get to
know the six basic tenets of the Dow theory.
1. The Averages Discount Everything
2. The market Has Three Trends
3. Major Trends Have Three Phases
4. The Averages Must Confirm Each Other
5. Volume Must Confirm the Trend
6. A Trend Is Assumed to Be in Effect Until It Gives Definite Signals
The Responsible Trader Lessons
That It Has Reversed
Source: Murphy, John. Technical Analysis of the Financial Markets; (c) 1999.

15. The Responsible Trader Lessons
The Dow Theory
Much of what we call today as technical analysis has its roots in Dow's
work. For this reason, all traders using technical analysis should get to
know the six basic tenets of the Dow theory.
1. The Averages Discount Everything
2. The market Has Three Trends
3. Major Trends Have Three Phases
4. The Averages Must Confirm Each Other
5. Volume Must Confirm the Trend
6. A Trend Is Assumed to Be in Effect Until It Gives Definite Signals
The Responsible Trader Lessons
That It Has Reversed
Source: Murphy, John. Technical Analysis of the Financial Markets; (c) 1999.

16. The Responsible Trader Lessons
The Responsible Trader Lessons
Technical Analysis
• Technical analysis comprises the study and interpretation of ‘market
action’ to try and project future price trends. All the information we
have comes from the past, and with it we use technical analysis to try
to predict the future so that we can trade profitably.
• The stock chart is the weapon of choice for this type of analysis. This
is the reason why Technical Analysts are often referred to as Chartists.

17. The Responsible Trader Lessons
Fundamental Analysis
• Fundamental analysis is the study of a company’s financial details. Its
purpose is to determine whether a company would make a good
investment based on an assessment of its financial health, potential
for profitability, growth prospects, and the value of the company
compared to the price of its shares.
• The balance sheet, profit & loss statement, and cash flow statement
are the focus of this type of analysis.
• Fundamental analysis can also include a consideration of a company’s
‘story’. To examine a company’s story you look at what it does, how it
makes its money, and how it is positioned to perform in the future
given the current economic climate.
The Responsible Trader Lessons

18. The Responsible Trader Lessons
Technical Analysis vs. Fundamental Analysis
Technical Analysis Advantages
• Technical analysis is based on objective data. You can look at a stock chart and
plainly see what’s happening right now. You can see which direction the price is
moving in. You can see how popular the stock is based on its volume
characteristics.
Technical Analysis Disadvantages
• Technical analysis doesn’t care about the company behind the stock. You might
want to know what industry the company is in, but apart from that, the
underlying company isn’t really a concern.
• The company might be carrying more debt than it can handle, its revenues and
cash flows might be weak, and it might not even be making a profit – who knows?
Technical analysis doesn’t concern itself with such matters.
Conclusion: For most investors, technical analysis is about “timing” your entries and
exits. For traders using technical analysis exclusively (i.e. no fundamental analysis),
they also use technical analysis to determine which stocks to buy.
The Responsible Trader Lessons

19. The Responsible Trader Lessons
Technical Analysis vs. Fundamental Analysis
Fundamental Analysis Advantages
• Fundamental analysis gives you an idea of what a company’s future
prospects are likely to be. Large institutional investors like to buy shares in
companies with good fundamentals.
Fundamental Analysis Disadvantages
• The timing of the financial statements used with fundamental analysis can
sometimes cause problems. If you get the information too late you might
end up buying the stock after it leaves the buy zone.
• Also, do the numbers make sense? Do they tell a story, or do they just add
to the confusion?
Conclusion: Fundamental analysis is useful for stock selection. It isn’t ideal for
determining entry and exit points, and for this reason, it’s mostly used by the
long-term buy and hold crowd.
The Responsible Trader Lessons

20. The Responsible Trader Lessons
The Responsible Trader Lessons
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