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The concept of making money by trading the markets – not from producing goods or transporting them, but by trading shares of the companies that do so – has been around for centuries. The idea of striking it rich, or of improving one's standing in the world by the sheer force of one's intellect, is an intoxicating concept that has mass appeal.

Trading markets have often been maligned as being unfair and tilted against the “little guy,” and with good reason. There are many examples of disparity in the trading markets, such as:

• The use of non-public inside information by unscrupulous individuals and companies

• The pump and dump antics of certain brokers, particularly involving penny stocks

• Analysts that tout a company to drive up its price, in order to allow their employers to sell at more favorable levels

• The use of high-frequency trading robots, which can place and cancel hundreds of thousands of orders in a millisecond

Despite these hurdles, trading is still a meritocracy in many ways. The markets do not care about your age, your skin color, or your beliefs. Markets do not care where you grew up, who your parents are, or where you went to school. The only thing that matters is the ability to extract money from the market. If you can do that on a consistent basis, you can change your life and the lives of the people who matter most to you.

Because of this strong appeal, men and women have been vying for centuries to create systems and techniques designed to anticipate market moves. This has led to a variety of concepts, many of them brilliant, some of them bizarre. Some techniques have stood the test of time, while others have faded into obscurity.

One early form of technical analysis that has survived dates back to fifteenth century Japan, where rice traders are credited with developing what we now call “candlestick charts.” Today, candlestick charts are more popular than ever, and can be easily obtained by anyone. Other early forms of technical analysis failed to survive, disappearing from our collective consciousness like a lost language.

Prior to the widespread availability of personal computers and the Internet in the late twentieth century, charts were usually drawn by hand. Frequently, updated books of printed charts were popular among traders, even though the fact that they were printed on paper meant they were, by definition, outdated.

Dow Jones & Company

Modern technical analysis is generally recognized as beginning with Charles Dow. Mr. Dow was a journalist who worked for the Kieran News Agency, along with statistician Edward Jones and reporter Charles Bergstresser. The three men left the Kieran Agency and founded Dow Jones & Company in November of 1882.

One year later, the company began distribution of the Customers' Afternoon Letter, a summary of the day's financial news. The two-page publication gained popularity with Wall Street investors, as it was considered a reliable source of actionable information. The daily letter eventually became known as The Wall Street Journal, which officially began publication in 1889.

The partners conceived of a grouping of stocks – an index – designed to make it easy to follow the market. The first Dow Jones index began tracking the market in 1885; it consisted of eleven components, including nine railroad companies. That index was the precursor to what is now known as the Dow Jones Transportation Average. Here are its original nine rail components:

Chicago, Milwaukee, and St. Paul Railway

Chicago and North Western Railway

Delaware, Lackawanna, and Western Railroad

Lake Shore and Michigan Southern Railway

Louisville and Nashville Railroad

Missouri Pacific Railway

New York Central Railroad

Northern Pacific Railroad (preferred stock only)

Union Pacific Railway

Two non-railroad companies were also included:

Pacific Mail Steamship Company

Western Union

In 1896, it was decided to divide the stock index into two; one index for the shares of industrial companies, and the other consisting of transportation companies. This led to the creation of the Dow Jones Industrial Average, which was first calculated on May 26, 1896.

Even today, the general public refers to the Dow Jones Industrial Average as “the market,” as in “the market was up 50 points today.” The reason why this index is so ingrained in our consciousness is because it was the first popular grouping of stocks to gain a widespread following. With just one statistic, it became possible to ascertain the general health of the U.S. stock market.

The Dow Jones Industrial Average

The Dow Jones Industrial Average initially consisted of a dozen stocks, including General Electric, which remains part of that index today. Together, these stocks were considered representative of U.S. industry. The U.S. economy was much more focused on manufacturing in Mr. Dow's day, so it made sense that an index based on manufacturing and production would gain significance during that time.

It's fair to ask if this index is as relevant in the twenty-first century as it was in the nineteenth. While the Dow Jones Industrial Average is not considered a broad measure of the U.S. stock market, it has evolved in order to remain a meaningful barometer of the U.S. economy. Initially, the index consisted of the following names:

American Cotton Oil Co.

American Sugar Co.

American Tobacco Co.

Chicago Gas Co.

Distilling & Cattle Feeding Co.

General Electric Co.

Laclede Gas Co.

National Lead Company

North American Company

Tennessee Coal, Iron, and Railroad Co.

United States Leather Company

United States Rubber Company

By 1928, the Dow Jones Industrial Average had expanded to 30 companies. Over the years, dozens of names have been added and deleted, usually due to their performance and/or perceived relevance to the economy.

Today, the U.S. economy is much broader than it was in 1896, and is considered a “service economy.” This means that actual services, such as repairing an automobile or cooking a meal, now make up a larger portion of the U.S. economy than manufacturing. Manufacturing can be done virtually anywhere due to automation, so it tends to occur where it can be accomplished inexpensively.

As a result, the Dow Jones Industrial Average is sometimes perceived as a narrow stock index, and professionals tend to focus on broader indices like the Standard & Poor's 500. This is somewhat unfair, as the Dow Jones Industrial Average is now a misnomer; it is no longer squarely focused on industrial stocks. Over the years, the index has diversified into the health and pharmaceutical, consumer goods, energy, technology, financial, and retail sectors, making it more representative of the true economy.

The Dow Jones Transportation Average

The Dow Jones Transportation Average is the descendant of the original rail-heavy index, making it older than the more prominent Dow Jones Industrial Average.

All of the goods created in U.S. factories need transport by ship, highway, or rail to their ultimate destinations. Therefore, an index was created from the companies that provided these services. The performance of these companies was considered indicative of the overall economy.

Is the Dow Jones Transportation Average still relevant? Despite the move away from manufacturing, transportation is still crucial to the U.S. economy.

This is made clear by the boom in North American energy production. In the early twenty-first century, North American output of crude oil and natural gas soared, thanks in part to advances in technology. This energy boom led to a huge increase in demand for rail transportation services, which in turn drove the transportation index to new heights. Clearly, transportation remains a relevant economic factor in the twenty-first century.

Like the Dow Jones Industrial Average, the Dow Jones Transportation Average has evolved with time. The original version predated the first powered flight, but today the index contains several airlines. In addition to railroads, which have merged into just a handful of names, the index also contains trucking, auto rental, and package delivery companies. This diversification allows the index to provide an accurate representation of the modern transportation sector.

Final Thoughts on the Cornerstone

When Charles Dow created his stock indices, he had no idea how significant they would become. The Dow Jones Industrial Average is so prevalent that many refer to it as “the market.” Today, there are futures, options, exchange-traded funds, and a variety of other instruments that can be applied to Mr. Dow's indices.