Dow Theory: Trend Remains In Effect Until Clear Reversal Occurs
AAA
  1. Dow Theory: Introduction
  2. Dow Theory: The Market Discounts Everything
  3. Dow Theory: The Three-Trend Market
  4. Dow Theory: The Three Phases Of Primary Trends
  5. Dow Theory: Market Indexes Must Confirm Each Other
  6. Dow Theory: Volume Must Confirm The Trend
  7. Dow Theory: Trend Remains In Effect Until Clear Reversal Occurs
  8. Dow Theory: Dow Theory Specifics
  9. Dow Theory: Current Relevance
  10. Dow Theory: Conclusion

Dow Theory: Trend Remains In Effect Until Clear Reversal Occurs

By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com

The reason for identifying a trend is to determine the overall direction of the market so that trades can be made with the trends and not against them. As was illustrated in the third tenet, trends move from uptrend to downtrend, which makes it important to identify transitions between these two trend directions. (For related reading, see Track Stock Prices With Trendlines.)

In Dow theory, the sixth and final tenet states that a trend remains in effect until the weight of evidence suggests that it has been reversed.

Traders wait for a clear picture of a trend reversal because the goal is not to confuse a true reversal in the primary trend with a secondary trend or brief correction. Remember that a secondary trend is a move in the opposite direction of the primary trend that will not continue. For example, imagine that the primary trend is up, but the indexes are currently selling off. If an investor were to take a short position, concluding that the sell-off is the start of a new primary downward trend, they could get burned when the primary trend continues.

Unless you can safely conclude, based on the weight of evidence, that the trend has changed, you will be trading against the trend. As a general rule, this is not a wise idea, as many have been hurt by trading against the market.

Dow Theory: Dow Theory Specifics

  1. Dow Theory: Introduction
  2. Dow Theory: The Market Discounts Everything
  3. Dow Theory: The Three-Trend Market
  4. Dow Theory: The Three Phases Of Primary Trends
  5. Dow Theory: Market Indexes Must Confirm Each Other
  6. Dow Theory: Volume Must Confirm The Trend
  7. Dow Theory: Trend Remains In Effect Until Clear Reversal Occurs
  8. Dow Theory: Dow Theory Specifics
  9. Dow Theory: Current Relevance
  10. Dow Theory: Conclusion
RELATED TERMS
  1. Premium to Surplus Ratio

    Net premiums written divided by policyholders’ surplus. The premium ...
  2. Current Liquidity

    The total amount of cash and unaffiliated holdings compared to ...
  3. Developed To Net Premiums Earned

    The ratio of developed premiums to net premiums earned over a ...
  4. Return On Policyholder Surplus

    The ratio of an insurance company’s net income to its policyholder ...
  5. Absolute Percentage Growth

    An increase in the value of an asset or account expressed in ...
  6. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...
  1. How do I build a profitable strategy when spotting a Rounding Top pattern?

    Learn a simple stock trading strategy that is designed to profit from a bearish trend reversal following the formation of ...
  2. What is the difference between profitability and profit?

    Calculating company profit and profitability are not one and the same, and investors should understand the difference between ...
  3. How do I implement a forex strategy when spotting a Rounding Top Pattern?

    Learn an aggressive forex trading strategy that can be implemented when a trader recognizes a rounding top pattern signaling ...
  4. How are Rounding Bottom patterns interpreted by analysts and traders?

    Understand what a rounding bottom formation is and how it is most commonly interpreted and acted upon by traders and market ...

You May Also Like

Related Tutorials
  1. Trading Strategies

    Basics Of Technical Analysis

  2. Fundamental Analysis

    Ethical Investing Tutorial

  3. Investing Basics

    Industry Handbook

  4. Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  5. Fundamental Analysis

    Discounted Cash Flow Analysis

Trading Center