An investor who took positions during the Bull Run, in a state of panic, gave up their positions when the indices saw the marginal correction. In many instances, it might be a marginal correction and investors end up booking loses.
If an investor follows Dow Theory such scenarios could have been avoided and could have taken a calculated call till it follows the guidelines prescribed under this theory.
Always follow Dow Theory: Higher top higher bottom or lower top lower bottom is the most significant principle of Dow Theory. In layman terms, it says that you should never exit your long positions in an underline asset if the asset is making higher highs with higher lows in a bull market or vice-versa.
Let’s take an example of Nifty: Since the beginning of this dream bull-run from December 27, 2016, Nifty index has been continuously trading in a higher top higher bottom structure. It has never managed to breach its lower low and has constantly breached its higher highs. A trader following this theory would have been able to capture the entire up-move, instead of exiting his positions during the marginal corrections in the index.
The below chart explains an ideal Dow Theory in action:
When to Exit?
Dow theory say’s if the underline assets are trading in a higher top higher bottom chart structure and the price negates the upward momentum by making a lower high and a lower low, only then the long positions should be exited.