3.6 Timing of investment at the securities exchange – Dow theory and Hatch system of timing

Timing of investment at the securities exchange is an important consideration for investors. Two well-known approaches to timing investments are the Dow Theory and the Hatch System. Here’s an overview of each:

Dow Theory: The Dow Theory is a technical analysis approach to market timing based on the principles developed by Charles Dow, the founder of the Dow Jones Industrial Average. It focuses on the analysis of market trends and the use of key market indicators. The theory consists of three main tenets:

The Primary Trend: According to the Dow Theory, the primary trend of the market is the long-term direction that lasts for several months to years. It is considered the most significant trend and is used to determine whether to invest in stocks or stay on the sidelines.
The Secondary Trend: The secondary trend represents shorter-term market movements within the primary trend. It typically lasts a few weeks to a few months and is used to identify buying or selling opportunities within the broader primary trend.
The Minor Trend: The minor trend refers to the day-to-day fluctuations in stock prices and is of lesser importance for timing investment decisions.

The Dow Theory suggests that investors should buy stocks when both the primary and secondary trends are upward, indicating a bull market. Conversely, they should sell or avoid stocks when both trends are downward, indicating a bear market. The theory also emphasizes the importance of confirming signals across multiple market indices to validate the trend.

Hatch System: The Hatch System is an investment strategy developed by Richard Hatch. It aims to determine the optimal time to buy or sell stocks based on market trends and price momentum. The system uses a combination of technical analysis indicators, such as moving averages and relative strength, to generate signals.

Buy Signals: The Hatch System generates a buy signal when the stock’s price rises above a specific moving average, indicating positive momentum. It suggests entering a long position or increasing the allocation to stocks.
Sell Signals: The system generates a sell signal when the stock’s price drops below a particular moving average, indicating negative momentum. It suggests exiting a position or reducing exposure to stocks.

The Hatch System focuses on trends and price movements to guide investment decisions. It aims to capture upward trends while avoiding or minimizing exposure during downward trends.