When the net directional change in the Dow Jones Index movement over one or more days exceeds 3% of the index price itself, it is referred to as an "up wave" or "down wave." When subsequent up waves break through previous highs and subsequent down waves terminate above prior lows, it indicates an upward price trend. When both the Dow Jones Industrial Average and Railroad Average are in upward trends simultaneously, the overall market can be confirmed as being in an upward trend. Conversely, the overall market is in a downward trend. The mutual confirmation between the Dow Jones Industrial Average and Railroad Average does not need to occur on the same trading day. (The lack of size limitations for highs and lows here creates difficulties in practical application)
The enlightenment Dow's "Trend Determination" theorem provides to investors lies not merely in its definition, but more importantly in Dow's methodological thinking reflected within it. From Dow's above theorem, we can observe the following principles:
1. Principle of Objectivity. The theorem proposed by Dow a century ago already demonstrated a tendency toward maximum objectivity. Of course, Dow's "Trend Determination" theorem did not achieve 100% objective results. Dow's definition of "waves" is objective. The comparison method for "waves" is objective, but the definitions of "highs" and "lows" were not completely objective. Therefore, there has always been historical controversy over Dow's trend determination points. Nevertheless, Dow's achievement of this near-objective research outcome a hundred years ago is truly remarkable.
2. Principle of Dual Elements. In the "Trend Determination" theorem, Dow decomposed trends into two fundamental elements: up waves and down waves. By comparing the transformational relationship between these two elements, one achieves an understanding of the essence of trends. Dow's dual-element approach represents an extremely important scientific research method. Einstein once said that only by decomposing a matter into two fundamental elements can one truly understand its essence. However, a considerable number of investment research methods violate this important scientific thinking approach, such as trend line definition methods. Superficially, whether defining trends by highs or lows, trend line methods may appear similar to Dow's "Trend Determination" theorem. In essence, because trend line methods consider only one element rather than two, they fundamentally differ from Dow's definitional approach.
3. Principle of Mutual Confirmation. Dow consistently adhered to the principle of mutual confirmation. This principle refers to the mutual verification of relational changes between intrinsically interconnected entities, such as between the Dow Industrial Average (representing production sectors) and Transportation Average (representing distribution sectors) that Dow proposed. Due to their intrinsic interconnected mechanisms' significant impact on the national economy, this became one of Dow's key focuses. Many investors fail to properly understand the mutual confirmation principle, leading to its erroneous application—a very common phenomenon.
In summary, the "Principle of Objectivity," "Principle of Dual Elements," and "Principle of Mutual Confirmation" embodied in Dow's "Trend Determination" theorem serve as important guiding principles for investors researching and developing trend definition methods (or other investment analysis approaches) suited to their personal characteristics.
