Can Dow Theory really guide trading? An experienced trader's in-depth review

Some say Dow Theory is the founder of technical analysis, while others believe it is long outdated. But if you truly understand the core of this theory, you’ll find it far more complex than you imagine—and much more practical.

The Three Eternal Truths of the Market

Dow Theory starts from three basic axioms: market behavior discounts all information, markets move in trends, and history repeats itself. This may sound like old news, but behind it lies a brutal fact—no external force can completely break this pattern. The main trend will never be artificially manipulated, and market indices always reflect all available information.

That’s why those attempting to manipulate the market through “market making” often only succeed in short-term bull markets. Because in bear markets, the power of shorting is too strong, and any manipulation is futile. In fundamental bullish or bearish trends, the forces driving the market forward far exceed what a single market maker can influence.

The Hidden Logic of the Three-Level Market

Dow Theory divides the market into three levels: the primary trend which can last years, corrective movements typically spanning weeks to months, and short-term fluctuations that happen daily, often called “noise.” This layered structure seems simple but is the root cause of most people’s losses—they confuse these three levels.

Interestingly, the primary trend often unfolds in three stages. The first is an initial reaction driven by fear or greed; the second is a rational rise reflecting real fundamentals; the third is an irrational expansion fueled by hope and expectations. Smart traders usually enjoy gains in the second stage and exit early in the third.

Bull-Bear Reversal: The Most Difficult Judgment

Dow Theory’s rules for identifying bull and bear markets seem clear: if the price surpasses the previous high, it’s a bull market; if it drops below the previous low, it’s a bear market. But in reality, you can never be sure if a reversal is genuine or just a correction.

This is why the index confirmation principle is regarded as the highest rule in Dow Theory—signals from a single index are meaningless; confirmation from two or more indices is required. In today’s markets, this means you shouldn’t just look at Bitcoin, but also Ethereum, the overall market, on-chain data, and capital flows.

A detail worth noting: if a bear market rebound reaches the previous high but doesn’t surpass it, then falls below the previous low, and later rebounds above that rebound’s high—only then can a new bull market be confirmed. In other words, the market creates multiple opportunities for you to verify the trend repeatedly.

The “Herd Phenomenon” Among Coins

This observation is particularly interesting. Dow Theory has long pointed out that if the main cryptocurrencies are rising but other coins are not following, it indicates market participants are cautious—they’re unwilling to risk chasing smaller coins. When this situation reverses—mainstream coins stop rising, and smaller coins start to rally—it often signals a fundamental shift in risk appetite.

Double Tops, Mirror Symmetry, and Divergence

Markets like to repeatedly test the same price levels. When a coin reaches a peak and pulls back moderately, then attempts to retest the high, if it falls again, the decline is usually larger. This is known as a double top pattern, a sign of weakening market forces.

Another pattern is mirror symmetry—markets dislike extreme trends and tend to balance out over time, with rising and falling phases roughly equal in duration. After a sustained rally, a decline is inevitable to maintain equilibrium. This “breathing” pattern runs throughout market history.

Divergence principles state: the further a coin’s index moves, the greater the counteracting force. This isn’t some mysterious power but a self-correcting market mechanism. The harder you push, the sharper the pullback, giving successful traders a high degree of certainty.

Secondary Rebounds: The Most Common Trap

Secondary rebounds typically last from 3 weeks to several months, with a retracement of 33% to 66% of the previous major move. This sounds technical, but in practice, it’s the easiest trap to fall into—you can’t tell whether it’s a correction or a trend reversal.

In early bullish markets, the movement can look exactly like a secondary rebound in a bear market; the same confusion can occur at market tops. This subtlety and difficulty can mean liquidation for traders using high leverage.

The Ultimate Dialogue Between Rules and Human Nature

Dow Theory leaves us with a thought-provoking statement: market fluctuations are never random—they are governed by certain laws. But these laws are so vast that we can only glimpse their trajectory once or twice in a lifetime.

This is not pessimism but realism. Dow Theory teaches us not how to predict the market, but how to respect its rules. Learning to wait for index confirmation, distinguishing among the three levels of trends, and recognizing our own ignorance—these are the most valuable lessons of this theory.