Sixth Tenet

Sixth Tenet

The whole process of identifying a trend is to determine the overall market movement so that trades can be done as per the trend and not against it.

The sixth and the final tenet of Dow theory states that “Trends remains in effect until there is definitive evidence indicating reversal of trend” . The tenet relates to the physical law applicable to market movement, which states that an object in motion will remain in motion until some external forces cause it to change direction. It is very important to identify true reversal in the primary tend rather than confusing with the secondary trend or a brief correction as a wrong decision of selling-off may hurt the investor if the primary trend continues.

The most difficult task is being able to distinguish between a normal secondary correction in an existing trend and the first leg of a new trend in the opposite direction. Dow theorists often disagree as to when the market gives an actual reversal signal. Unless it can be safely concluded, based on the weight of evidence, that the trend has changed there is no point trading against the trend.

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