Charles Dow is credited with the idea that market averages discount all information, and are better indicators of the overall trend of the market than individual stocks. Dow believed there were three trends to the market, which he called the primary, secondary and minor trends, and used the analogy of the tide, the wave, and the ripple. The primary move was considered the major move in the market, with the secondary and minor trends the actions or reactions of the major move. An important consequence of this idea is that the trader should always be aware of the major move, and try to trade in the direction.

The major trend exhibits three phases called the accumulation, markup, and distribution. The accumulation phase occurs when the market is trading near its lows and public interest is minimal. Knowledgeable players begin accumulating the contracts or shares from a disinterested public. The markup phase occurs when the market starts to move higher and public interest and participation begins to increase. The distribution phase occurs when the market has reached higher levels and is now fairly valued or overvalued. Public participation and awareness is now at the highest level, but the more knowledgeable players are distributing their holdings to the public.

If the major trend of the market is up, the primary move and the markup in prices is called a bull market. If the major trend is down, then the primary move and the mark down in prices is called a bear market.

Using the ideas in the Dow Theory, it is often convenient to break the market into three separate time frames of long, intermediate, and short term. The size of the time frames may vary among traders depending on their holding period and price objectives. A good starting point for time frames is to consider the long term one or more years, the intermediate term between three to twelve months, and the short term less than three months. For some day traders the long term could conceivably be one week, the intermediate term one day, and the short term five minutes. Long-term position traders would have much different time frames. An exact definition is not really important. It is often helpful to think in terms of relative but distinct time frames and trends, and always try to trade with the major trend.