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Understanding Dow Theory: Technical Analysis 101

Most notable is the fact that on a risk-adjusted return basis, Dow Theory has historically vastly outperformed buy-and-hold investing. That's because the exit signals that Dow Theory provides yields significantly lower market exposure (and smaller drawdowns) for its followers. More recent backtests using a long/short strategy have delivered even more impressive results:

According to research from Martin Pring’s book Technical Analysis Explained, buying and holding a basket of Dow stocks between 1897 and 1990 would have turned an initial $44 investment into an admittedly impressive $2,500; using Dow Theory to manage that same $44 would have turned it into $51,268. Not surprisingly, today, a considerable number of investors have started using an offshoot of Dow Theory in managing their money.

While the in-depth specifics on Dow Theory are far too detailed to delve into here, hopefully we've whet your palate for more details on applying Dow Theory to your portfolio. While this investment strategy may be a century old, it’s still got the ear of a sizable chunk of Wall Street. 

This article is commentary by an independent contributor.
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