Dow theory is the method of identifying trends in the stock market. It was given by Charles Dow in 1900. It studies the major movements in the market with a view of establishing trends. It only describes the direction of market trends and does not forecast future movements and durations or size of the market trends. In 1932 the Dows theory was formalized by Robert Rheas. It majors the size and duration of trends proposed. It uses the behavior of the stock market rather than forecasting stock prices themselves. It assumes that stocks follow underline market trends.

1.)    The Averages Discount Everything: - Every possible factor affecting supply and demand must be reflected in the market averages.

2.)    The Market Has Three Trends: - The primary , secondary and minor. An uptrend has a pattern of rising peaks and troughs. A downtrend would be just the opposite with successively lower peaks and troughs.

3.)    Major Trends Have Three Phases: - the accumulation phase, represents informed buying. The second phase, where most technical trend follower begin to participate, takes place as price begin to advance rapidly. The final phase is characterized by informed investor who begin to distribute when no one else does.

4.)    The Average Must Confirm the Trend: - No important bull or bear market signal could take place unless both averages give the same signal.

5.)    Volume Must Confirm the Trend: - Volume should expand in the direction of the major trend. It is an important factor in confirming the signals generated on the price charts.

6.)    A trend is assumed to be in effect until it gives definite signal that it has reversed.