Dow Theory Problems

There were a number of inherent problems with Dow’s Theory that a lot of Dow critics were, and still are, quick to point out. In order to provide a completely unbiased and full picture of Dow’s Theory – it is often useful to be aware of some of the limitations that his theory had.

Signals are late

Perhaps the most common criticism of Dow Theories is that it is always late. Most analysts that criticise Dow’s Theory do so because it they believe that it does not accurately indicate top or bottom market moves. These criticisms are inaccurate since Dow’s Theory was never intended to indicate top or bottom market moves and consequent trading positions, but rather indicate the overall business cycle and the direction of the primary trend. It is often easy for many technical analysts in modern society to relate Dow’s Theory to that of day trading, and it is a foolish comparison since the two are measuring entirely different time spectrums.

Transport has changed

Technological changes have rapidly decreased the amount of freight that is delivered by railroad in modern society, and as a result the comparison between the two averages does no longer represent a complete economic picture of the market. While the Dow-Jones Railroad Average and the Dow-Jones Transport indexes exist, the future of their use remains in doubt with the increase of services as a proportion of output which will mean that these indexes will no longer be as useful.