Dow Theory

We’re usually familiar with ‘trends’ in the world of fashion or social media, but what does ‘trend’ mean in trading?

Pretty much the same thing.
Except that instead of a trending TikTok video or a trending handbag, we’re talking about a trending market. And no, it doesn’t only relate to a specific asset that is currently trending.

In technical analysis, a trend is like a recurring market tendency. Dow believed that the market moves in three trends, which he categorized as tides, waves, and ripples.

Let’s see what that means.
The first one is a tide, known as the primary trend, which relates to the market's long-term movement, typically lasting a year or more. This type of trend is often identified as bullish or bearish. It is generally considered that other trends take place within these broader trends.

The second one is a wave, known as the secondary trend, which usually lasts anywhere between a few weeks and a few months. This trend often goes in the opposite direction of the primary trend. In other words, if the primary trend is bullish, the secondary trend will cause a pullback, and if the primary trend is bearish, the secondary trend will cause a rally.

Last but not least is the ripple, also known as the minor trend, which represents the temporary fluctuations in the market. Minor trends often last a few days to a few weeks and are sometimes discarded as mere ‘noise’.

Till next time!