Dow Theory
Lesson 15 of 39 in the course “Crypto”. Free, with animations and a quiz.
Dow Theory is one of the first ideas about trends, over 100 years old. An uptrend means every new high is above the last one (HH, higher high) and every low is above the last one too (HL, higher low).
As long as the HH + HL chain is intact, the trend continues. Every pullback ends above the previous low, which means buyers are stronger. Buying with the trend makes more sense here than betting against it.
Dow says a trend has three phases. 1: accumulation, big players quietly buy. 2: the crowd notices the rise and joins. 3: euphoria, everyone is sure it will keep going, while early buyers are selling.
Price broke the last HL, meaning it fell below the previous low. The chain snapped. It is not a reversal yet, but the trend is in doubt. Next, watch whether lower highs and lower lows appear.
Check yourself
- What is an uptrend in Dow Theory?
Correct answer: Highs and lows keep rising: HH and HL. An uptrend means every high (HH) and every low (HL) is above the previous one. - In which trend phase does almost everyone jump in?
Correct answer: The euphoria phase. In euphoria everyone sees the rally and the crowd piles in. Meanwhile, the early buyers are selling. - What is the first sign an uptrend is weakening?
Correct answer: A break of the last HL. If price falls below the previous low, the HH + HL chain is broken. That is a reason to be careful, but not a reversal yet.
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