The Grandfather of Trends: Dow Theory's Three Movements and Confirmation

What is Dow Theory?

Dow Theory is the ancestor of all technical market research. It classifies market movements into three trends, which is crucial for determining the general direction.

The Metaphor of Three Trends

Primary Trend: Like the ocean's tide. This is the main direction, usually lasting more than a year, with price moves exceeding 20%. This is what long-term investors should focus on.

Secondary Trend: Like the waves within the tide. These are corrections (pullbacks or rallies) to the primary trend, usually lasting 3 weeks to several months, retracing 1/3 to 2/3 of the previous move.

Minor Trend: Like the ripples on the waves. Lasting less than 6 days, these are easily manipulated and significant only as components of secondary trends.

Key Principles

Principle of Confirmation: A new high in one average is not enough to confirm a bull market; two averages (e.g., Industrials and Transports) must confirm each other for the signal to be valid.

Volume Confirms Trend: Volume should expand in the direction of the major trend. In a bull market, volume increases on rallies and decreases on declines.

Trend Persistence: A trend is assumed to continue until a definite signal of reversal is given.