Glossary term
Dow Theory
Dow Theory is the classic framework, built from Charles Dow's editorials, that reads markets through three simultaneous trends — primary, secondary and minor — confirmed when related averages move together and validated by volume; a primary trend is treated as intact until a definitive reversal proves otherwise.
The Three Trends
Dow Theory decomposes price action into three layers running at once. The primary trend is the multi-year direction of the overall market — the tide. The secondary trend is a multi-week to multi-month correction against the primary trend — the waves within the tide. The minor trend is the day-to-day noise underneath both — the ripples. The framework's discipline is refusing to mistake a secondary reaction, however sharp, for a change in the primary trend, and refusing to read minor daily noise as trend information at all.
Confirmation and Volume
The theory's signature test is confirmation between related market averages — originally the Dow Jones Industrial and Transportation Averages: a genuine primary trend should show up across both, not just one. If one average makes a new high or low that the other fails to confirm, the theory treats that as a warning the trend is narrower than it looks. Volume is the second check — it should expand in the direction of the primary trend and contract on counter-trend moves; volume that runs the other way is read as the trend losing conviction before price itself turns.
Legacy — Ancestor of Modern Trend Analysis
Dow Theory predates the mathematics of modern trend-following systems by roughly a century, but its structure is recognizable in almost all of them: a primary direction that persists until proven otherwise, corrections that do not by themselves invalidate the trend, and confirmation across more than one data series before a signal is trusted. Elliott Wave theory built directly on Dow's tide-and-wave language with a more prescriptive pattern count, and modern breadth measures — the percentage of stocks participating in a move — are a statistical descendant of the same confirmation logic Dow applied to two averages a century ago.