Dow Theory for the CMT Exam: The 6 Tenets Explained

What Is Dow Theory?

Dow Theory is the foundational framework of modern technical analysis and a critical topic for CMT Level 1. Developed by Charles Dow in the late 1800s through his Wall Street Journal editorials, it provides the philosophical underpinning for all chart-based market analysis.

For a complete overview of how Dow Theory fits into the CMT curriculum, see our Ultimate CMT Exam Guide 2026.

The Six Tenets of Dow Theory

1. The Market Discounts Everything

All known information — fundamental data, political events, market psychology — is already reflected in market prices. This is the core principle behind why technical analysis works.

2. The Market Has Three Trends

• Primary trend: The major trend lasting months to years (bull or bear market)
• Secondary trend: Corrections within the primary trend (3 weeks to 3 months, retracing 33–66% of the primary move)
• Minor trend: Short-term fluctuations lasting less than 3 weeks

3. Major Trends Have Three Phases

• Accumulation phase: Informed investors buy against prevailing sentiment
• Public participation phase: Trend followers and the broader market join in
• Distribution phase: Informed investors sell to late-arriving buyers

4. Averages Must Confirm Each Other

Originally referring to the Dow Jones Industrial Average and the Dow Jones Transportation Average — both must confirm a new trend. A new high in one index not confirmed by the other is a warning signal.

5. Volume Must Confirm the Trend

Volume should expand in the direction of the primary trend. In an uptrend, volume should increase on rallies and decrease on pullbacks. This is closely related to market breadth analysis.

6. A Trend Persists Until Definitively Reversed

Trends remain in effect until clear evidence of reversal appears. This tenet warns against premature trend-change calls and is the basis for trend-following strategies.

Modern Applications of Dow Theory

While developed over a century ago, Dow Theory remains directly applicable:

• Trend identification using moving averages as proxies for Dow's trend definitions
• Intermarket confirmation expanded to include bonds, currencies, and commodities via intermarket analysis
• Volume analysis enhanced with modern breadth indicators like the McClellan Oscillator

CMT Exam Tips — Dow Theory

Ready to test your Dow Theory knowledge? Try our practice tests or continue to the complete CMT exam guide.