Updated: Dec 6, 2020
Beginners Guide to Investment in 2020 Using Charles Dow Theory
How do I start investing in the stock market?
What is a good way to invest your money?
These are some of the top questions asked on the "Investments in the Stock Market." This article aims to answer these questions.
When it comes to investing, there are two schools of thought:
Fundamental Analysis and
Fundamentalists are more concerned about the company's management, various products, Sales, Price to earnings ratio, Balance sheet, Cash flow, Debt to equity ratio, etc. Broadly they are concerned about qualitative as well as quantitative aspects of the Company analysis.
Technical Analysts consider the analysis of past behavior of prices to interpret their study. They believe that the price contains all the information, and it's enough to analyze the price chart.
I belong to the technical analysis category. I will give a simple technique so that anyone can start investing immediately after reading this post.
Charles Dow wrote a series of Wall Street Journal editorials from 1900 until the time of his death. As per Dow, all market-related information – past, present, and even future is discounted and reflects on the charts.
As per Dow, market movements can be divided into three types, and at any time, the price is the combination of any of these three types. These three types are:
2) Downtrend, and
An Uptrend consists of series of Higher Lows (HL) and Higher Highs (HH) as shown in the above image. We can say, the price is in an uptrend until it keeps making HL and HH.
Image-2 and Image-3 are the two examples for uptrend scripts.
A Downtrend consists of series of Lower Lows (LL) and Lower Highs (LH) as shown in the above image. We can say, the price is in a downtrend until it keeps making LL and LH.
Image-5 and Image-6 are the two examples of downtrend scrips.
When the price starts making the same Lows and same Highs, it can be recognized as a sideways trend.
Image-8 and Image-9 are the two examples of sideways trend scripts.
How to Identify the Change in Trend?
To make more money in the market, you have to take Entry at the beginning of the Uptrend and you have to exit at the beginning of the Downtrend.
However, it is always a challenging task to identify the beginning of the uptrend and the beginning of the Downtrend.
Dow Theory helps us to identify these market turns with ease.
Buy the No.1 book on investment "The Intelligent Investor" here.
End of Down Trend
As shown in the above image, the first price stops forming Lower Lows (LL) and Lower Highs (LH) and next forms a Higher Low (HL). The break of the next high indicates the end of the Down Trend and the beginning of the new Uptrend.
Image-11 and Image-12 show the examples for the end of a downtrend (or a beginning of uptrend).
One can look for such scripts to make an entry for fresh investments.
End of Up Trend
Only 'Entry' and 'Exit' decides the fate of your investment decisions irrespective of your experience, qualification, and reputation.
Hence, it is better to know the good 'Exit' point to take more profits. The end of the uptrend provides a good idea on the 'Exit' point.
As shown in the above image, the first price stops forming Higher Lows (HL) and Higher Highs (HH) and next forms a Lower High(LH). The break of the next low indicates the end of the Up Trend and the beginning of the new Downtrend.
Image-14 and Image-15 show the examples for the end of an uptrend (or a beginning of downtrend).
Whenever your script displays this scenario, it’s better to sell the scripts.
Smart people know that Trading/Investing in one pattern is more valuable than using multiple patterns.
Two best quotes on "Investment" to end this article:
"The Stock Market is a Device for Transferring Money from the Impatient to the Patient" - Warren Buffett
“Know what you own, and know why you own it.” – By Peter Lynch
Below are the best books to learn more about investment.
"One Up On Wall Street" by Peter Lynch
"The Intelligent Investor" by Benjamin Graham