Dow theory is based on the basic principle that “Market Discounts Everything” which means that all the past, current and future events are discounted in the market and reflected in the prices of stock and indexes. These events may include emotions of the investors, inflation, interest rate, earning announcements etc. The only events that are excluded are those whose occurrence is unknown such as earth quake, flood or any other unforeseen event.
This means that over any period of time, all the factors – those that have happened, are expected to happen and could happen – are priced into the market. Therefore given any event, the market adjusts long with the prices as per the existing condition. Like mainstream technical analysis, Dow theory is mainly focused on price. However, the two differ in that Dow theory is concerned with the movements of the broad markets, rather than specific securities.
