The Parts of a Trend

Now you may remember that Dow Theory talks about the three parts of a trend, the primary, secondary, and minor. The primary may last for years, and the secondary is a short term retracement within that primary trend. Minor covers anything else of shorter duration, and in real life there are many small fluctuations up and down.

Each trend becomes part of the next bigger trend, so the minor trends make up the secondary trend, and the secondary trend is part of the primary trend, and is sometimes called a ‘correction’ to that trend. This means that in practice charts are not quite as neat as already illustrated. Here’s a more complex illustration of how prices move.

The solid line represents the price chart, and the dotted line is included to show the uptrend more clearly. You can see that B and D are successively higher peaks, and that A and C are successively higher troughs, and they define the movement as an uptrend. The retracement or correction is from B to C, which represents the secondary or intermediate trend. But B to C is broken up by another retracement, this time an uptrend from E to F.

It is easy to see how there can be a confusion over what trend is in force at any particular time. To a position trader, the trend is clearly an uptrend from A to D. A short term trader may want to trade on the downtrend from B to C, whereas a day trader might see an uptrend for a couple of days from E to F, and be happy to trade on that. So if you are talking to other traders, you need to know what sort of trading they are doing to see the trend from their point of view.

Here’s an actual example of a stock chart, in which you can see the different types of trend.

While the overall primary or major trend is upwards, and you can clearly identify the successively higher peaks and higher troughs, the secondary retracements clearly form downtrends on a smaller timescale.

So how you view chart trends depends on what sort of trading you’re doing. Most traders who follow a trend following system will find it possible to trade secondary trends, which Dow said lasted from three weeks to three months, as well as the primary moves, with the shorter term price movements being watched for entry and exit timing.

In general, it is good practise to follow the trend. If you don’t, then you’re betting against the market.

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