Dow Theory: Understanding the Three Types of Market Trends
Charles Dow developed Dow theory in the late 19th century and early 20th centuries. It is a market analysis technique based on the belief that the stock market is indicative of the health of the economy. The concept of trends is one of the most important components of Dow theory. Dow says there are three types market trends: primary, secondary and minor. Investors can make better investment decisions if they are able to understand these trends .
Primary trend:
The market's primary trend is the long-term one. It is determined by economic conditions. This trend is the overall direction of market and can last several years. This trend is marked by higher highs and lower lows (bull market) or lower lows, and higher highs (bear market). Because it reflects the economic conditions, the primary trend is the most important. It's also the best indicator of market direction.
Secondary trend:
A secondary trend is a short-term response to the primary trend. This can be a correction to the primary trend and lasts for several weeks or months. Secondary trends can either be bullish or bearish and are caused by changes in market conditions like profit-taking, interest rate changes or unexpected news.
Trends that are minor:
A minor trend is a daily fluctuation in market prices. This can last from a few days to a full week. It is caused by short-term market conditions like supply and demand, technical analysis, and speculation. Minor trends are the most important. They don't reflect the economic fundamentals and are considered noise in the market.
Trend analysis is also emphasized in Dow theory. Dow claims that trends can be identified in markets by studying the movements of averages over time . If the averages are moving in the same direction over a prolonged period, it is called a trend. A trend that is established is expected to continue until it changes direction .
Dow theory, a market analysis technique, is based on the belief that the stock market is an indicator of the health of the economy. There are three types of market trends: primary, secondary, and minor. Investors can make better investment decisions if they are able to understand these trends . Investors can get valuable insight into market trends and market direction and make better investment decisions by analyzing them.