Dow Theory is often mentioned, but in fact, it’s a theory that’s over 100 years old. It was developed by Charles H. Dow as a framework for market analysis, and it’s still effective for interpreting current trend reversals.

The fundamental idea proposed by Dow is that the overall market reflects business conditions. In other words, by observing price movements, you can get a clear picture of market psychology. He used the Dow Jones Industrial Average and the 輸送平均 to validate this theory. The idea is that if one average rises and the other confirms this movement, it indicates a genuine trend reversal.

Market trends operate on three levels. First, the primary trend is a major movement lasting several months to years. Next, the secondary trend is a medium-term correction lasting a few weeks to months. Lastly, the tertiary trend involves short-term fluctuations lasting days to about a week. For investors, understanding the relationship among these three levels is crucial. For example, if a bullish primary trend is accompanied by a bearish secondary trend, it could present a buying opportunity.

Although Dow Theory was originally designed for the stock market, it has also been applied to the cryptocurrency market. Bitcoin and altcoins move through cycles of accumulation, expansion, and distribution. During the accumulation phase, large players quietly buy; in the expansion phase, small investors jump in; finally, during the distribution phase, large players sell off. Recognizing this flow can help identify the timing of trend reversals.

Cryptocurrencies operate 24/7 and are heavily influenced by emotions. That’s why Dow’s principles, especially confirming volume, are so important. A strong trend should always be accompanied by significant trading volume. Price increases without volume may not be a true trend but just a temporary fluctuation.

In a bullish market based on Dow Theory, there are three stages. First, during the accumulation phase at the bottom of a bear market, everyone is pessimistic. Next, during the public participation phase, market participants recognize the opportunity and start buying actively. Finally, in the distribution phase, the trend ends as speculation continues and large players sell off. Conversely, in a bear market, these stages occur in reverse order.

An interesting principle of Dow Theory is that a trend continues until a clear reversal is confirmed. This means once an uptrend begins, you shouldn’t doubt it until a genuine reversal signal appears. Many traders mistakenly interpret corrections within a secondary trend as a true trend reversal.

The concept of cross-index correlation might be somewhat outdated today. In the past, transportation and manufacturing were closely linked, but digitalization has reduced the importance of physical logistics. However, the core principles of Dow Theory—reading market psychology, confirming with volume, and cautiously judging trend reversals—still hold true.

Ultimately, Dow Theory has persisted because it introduced the concept of market trends. Critics may say it’s outdated, but many traders still rely on this framework to interpret current markets. Whether in stocks or cryptocurrencies, Dow Theory remains valuable as a mental model for identifying genuine trend reversals.