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. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  3. Annuity

    A financial product that pays out a fixed stream of payments ...
  4. Einhorn Effect

    The sharp drop in a publicly traded company’s share price that ...
  5. Endowment Effect

    The endowment effect describes a circumstance in which an individual ...
  6. Self-enhancement

    The self-enhancing bias is the tendency for individuals take ...
  1. What are the best technical indicators to complement the Uptick Volume?

    See how uptick volume can be used to help confirm price trends from nearly every trend-following indicator, especially when ...
  2. What makes command economies fail?

    Read about three competing theories about the failure of socialism and command economies: human incentives, political corruption ...
  3. How is the Altman Z-Score used in fundamental analysis?

    Learn about the Altman Z-score, how it is calculated and how to interpret the Altman Z-score to assess the viability of a ...
  4. What does it mean when a company has a high capital adequacy ratio?

    Learn about the capital adequacy ratio, what the ratio measures, how it is calculated and what it means when a bank has a ...

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