Dow Theory – The price dicount all the news!

Continuing the series of articles devoted to the Dow theory, you should pay attention to such an important section of the theory that underlies the market – The Price discount all the news.

The statement “The Price discount all the news” means that the price of an asset fully reflects all the data that may affect the asset. That is, all published statistics on the company is fully reflected in the value of its shares. This pattern applies to all assets – from stocks and raw materials to indices.

On approval, the Price discount all the news is a hypothesis of market efficiency and also less popular ones that have something in common with it. Without going deep into various kinds of theories, we will try to deal with this postulate “Price discount all the news”.

Planned data

The planned data includes data that are beyond the planned time frame and include: publication of statistics, reports of the Central Bank, corporate reports. All that falls into the economic calendar.

Depending on the significance of the news, a corresponding market reaction to the published information will occur. In most cases, it is a lightning reaction that quickly changes the value of an asset depending on its significance. So, the news can change the cost from several points to several tens or hundreds of points in seconds.

Unplanned data

The unplanned data include force majeure situations, scandals, conflicts, terrorist attacks, technological and natural disasters. All that can not be foreseen or expected, and it is perhaps the share of information that the market can not take into account until the last moment, as it becomes known. Regarding the planned data, the market makes forecasts and expectations. Not planned data can not be predicted and the reaction to them is much more significant than the planned data.

Expectations and forecasts

This is some kind of information that is taken into account at the level of risk. This type of data includes unconfirmed rumors and unofficial forecasts, which are confirmed over time. The market reaction to such information is often restrained and carries with it a more corrective nature, aimed at minimizing risks. At the same time, there is a stable saying on the market “Buy on rumors, sell on facts”, which also confirms the theory that the price discount all the news.

In conclusion, we can add that the lack of market response to certain data is related to the fact that they were already taken into account as expectations or in combination with other information.

In the next article we will talk about the Dow theory, which speaks about the volume, as a confirmation of the trend.

Anton Hanzenko