Fifth Tenet

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The fifth tenet of Dow theory states that “Volume must confirm the trend”. According to Dow theory, the signals for buying and selling are primarily based on the price movements of the indexes but volume can also be used as a secondary indicator to confirm what the movement of price is suggesting.

This means that volume should increase when the price moves in the direction of the trend and decrease when the price moves in the opposite direction of the trend i.e., during a major uptrend, volume increases as price moves higher, and diminish as prices falls. One of the major reasons for such a movement is  that the uptrend shows strength when volume increases as traders are more willing to buy an asset with the belief that the upward momentum will continue where on the other hand low volume during the corrective periods signals that most traders are not willing to close their positions because they believe the momentum of the primary trend will continue.

On the contrary if volume offsets trend then it signals weakness in the existing trend. For instance if the market is in an uptrend but the volume is weak then it is a sign of dissipated buying. It is a situation of uptrend yet the buyers starts leaving the market and turn into a seller, then there is a little chance that market will continue its uptrend and the same is true when there is increased volume on down days which is an indication that more and more participants are becoming sellers in the market.

“Once a trend has been confirmed by volume, the majority of money in the market should be moving with the trend and not against it.”