Charles Dow, author of the most famous stock market information company Dow Jones and Company and the world famous Wall Street Journal, he also gave his name to a theory : the Dow’s theory.
This theory identifies three main trends :
– The primary trend that lasts more than a year
– The secondary trend that lasts a few months and generally corrects the primary trend
– The tertiary trend that lasts a few weeks maximum
The principle of this trend is simple: an upward trend is graphically materialized by a succession of increasingly high peaks and valleys.
In this example, we can see the peaks (yellow) getting higher and higher and the valleys (blue) also getting higher.
Similarly, a downward trend takes the form of increasingly low peaks and valleys.
Example of a downward trend.
Dow’s theory is widely used in the trading world because it allows you to see at a glance the direction of the trend: bullish, bearish or neutral (range). Sometimes, we do not visualize very well the price movement and the general direction of the trend (this often happens in range). It is then advisable to take larger time units and visualize the low and high points. This allows you to quickly find the direction of the trend.
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