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Dow Theory is based on the analysis of the early history rates of the New York Stock Exchange, where it has been already noticed a clear trend towards the simultaneous increase or decrease in the vast majority of the shares. It was noted that most of the courses is bound to the general public in the overall market trend.
Dow theory is based on the assumption that changes in quoted shares are most consistent with the general trends in the stock market. During the bull market, prices of the most shares are increasing, but when there is a bear market – shares mostly lose their values and it is a signal – signal to sell or to buy.
Dow distinguished several types of trends because of their duration:
- Primary trend (base) – usually takes several years;
- Major trend, also known as the primary or long-term trend – takes at least a year or more years (on average 2 to 4 years);
- Secondary trend, also known as medium-term trend – it usually lasts from one to several months. Secondary trends are subordinated to the original trend;
- Minor trend, also called tertiary or short-term trend – it takes several days to several weeks and it is the part of secondary trend. And in short term it can be signal to buy or to sell.