Understanding Dow Theory & market trends
Dow Theory categorises three movements in the financial markets, which is known as the primary, secondary, and daily movements.
Dow theorists compare these movements to the action of the ocean as seen from the sandy beach and correlate the primary movement of the market to a tide, the secondary movement to the waves, and the daily movements to ripples. Even, Elliott Wave Theorist postulate market movements in the sets of five impulse waves and three corrective waves. Though there have been different approaches to the meaning and application of swing trading methods, at the heart of all of them, lays the fundamental concepts of the wave theory.
A swing trader tries to capture the movements of price swings, primarily driven by momentum expansions and contractions. Contrary to the popular belief, such expansions and contractions of momentum happen in all types of market conditions, like uptrends and downtrends as well as directionless sideways movements, barring perhaps narrow corrections. When swing trading is approached with this, understanding a trade position can last from a few minutes intraday to even a few months, depending upon the time periods of price charts i.e. minutes, hours, daily, weekly, etc., being used by a trader. The popular belief, however, is that a swing trade basically lasts from two to a few days and falls somewhere between day trading and position trading.
For swing traders, the most important thing is the availability of a swing, irrespective of its direction. By virtue of this approach, swing traders can, and usually, trade all swings whether in the direction of the trend or counter to the trend. There are several methods and strategies these traders use, depending upon the market structure at a given point in time. For example, well-defined trends usually travel in channels, sloping up or down, and a swing trader tries to buy near the bottom channel line and short near the upper channel line. A similar approach is followed in sideways markets when the prices move in rectangles.
Whatever the method or strategy be, including the time frame a trader chooses, he is trying to make the most from the price swings the market structure offers him.