According to Charles Dow, the primary trends that we discussed in our previous video occur in three phases.

These include the accumulation phase, the public participation phase, and the distribution phase.

But what does it all mean?
Well, the first phase happens when savvy investors, also known as ‘smart money,’ begin to accumulate stocks that are usually at the bottom of the downtrend due to the bad news and fundamentals surrounding the company.

Then, the second phase follows. This is when the general public catches on with the savvy investors and begins to participate in the company stock as they see that the company’s earnings are improving.

After all, this is the phase where the traders identify the trend's early stages. This causes a sharp market reversal.

Finally, phase three takes place. This phase is characterized by even higher prices as latecomers enter the market. The company begins to show great prospects and growth, and the newspapers publish bullish news.

Dow’s theory says the savvy investors who began accumulating during phase one when no one else wanted to buy are now ‘distributing’ or selling when no one else is doing it.

Does this theory remind you of anything?
Maybe you’ve heard the expression ‘Buy Low, Sell High’?
A lot of trading strategies used today can be traced back to Dow’s third principle.

But for now, let’s move on to the fourth one.