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.
InvestingFundamental trends are an important driver of financial markets and every investor and entrepreneur should analyze them.
TradingThe following five rules will help traders find high profit potential, low risk, intra-day trades.