Deep-Level Insights into Market Trading Secrets Through Chan Theory——Detailed Explanation of Practical Trading Systems

Chánlùn has opened a new window for understanding financial markets. Through deep insights into human nature—greed, anger, ignorance—this theoretical system uses mathematical rigor to transform seemingly chaotic market movements into quantifiable, actionable trading signals. Rather than just a technical analysis tool, it redefines the very essence of the market.

This is not simply stacking indicators or anecdotal experience, but the first time building a trading framework on a rigorous axiomatic system. It allows traders to make decisions based on solid reality rather than relying on intuition or emotion.

How Chánlùn Deconstructs Market Patterns

Every market fluctuation follows hidden rules. Chánlùn transforms disorder into order through two dimensions: “encoding” and “deconstruction.”

Encoding logic classifies market trends according to specific rules, like organizing a scattered crowd into formations. Through this process, complex price movements become as clear and recognizable as palm lines.

Deconstruction involves breaking down completed trends into units across different time levels. Each level’s breakdown corresponds to buy points, sell points, and risk control levels in trading.

These two processes complement each other, enabling traders to see both the big picture and details across multiple timeframes simultaneously.

From Rules to Practice: The Three Pillars of the Chánlùn System

The operational system of Chánlùn is simple at its core: Central, Trend Type, and Level.

The Central (Zhongshu) is the “center of gravity”. In a given level’s trend, the part overlapped by at least three consecutive sub-level trends forms the central. It may seem complex, but in practice, visual judgment suffices. Changes in the central—formation, extension, emergence, expansion—correspond to different market opportunities.

Trend type determines the trading direction. Is it consolidation or trend? This is fundamental. Unlike traditional definitions—where a single central indicates consolidation, and multiple same-direction centrals indicate a trend—this system’s definition avoids many false signals.

Level is the “time scale” of trading. The same upward move on a daily chart versus a 5-minute chart has entirely different trading implications. Level not only defines the timeframe but also influences capital management and risk scale.

All three pillars are indispensable. Without level, buy/sell points lose meaning; without trend type, the central’s continuation cannot be judged; without the central, trend type analysis is baseless.

The Art of Levels and the Dimension of Trading

The master of Chánlùn once said levels are like axioms in geometry—without needing definition. But this seemingly simple concept is often overlooked and is the most critical issue.

Levels are determined by three factors: capital size, personal temperament, and systemic risk. A million versus ten thousand in capital involves not just scale but also different time horizons. Ten thousand can freely enter and exit on a 1-minute level, while a million must consider daily trend.

This leads to a key trading logic: Major levels set the overall direction; minor levels fine-tune entries and exits. When the daily trend is upward, fluctuations on 5-minute or 15-minute charts are just “noise.” The main task is to use these small fluctuations to lower costs via buy/sell points. If skill is limited, simply hold positions and wait for major level signals.

Conversely, when the major level turns downward, small-level rebounds are just “bounces.” In this case, following small-level signals may cause loss of holdings.

Level application runs through the entire Chánlùn system. Trend types have levels, divergences have levels, capital size has levels, risk ratings have levels. Mastering levels is essentially mastering the soul of Chánlùn.

Three Defensive Lines: Pattern, Divergence, and Buy/Sell Points

If the central, trend type, and level are the “skeleton,” then pattern, divergence, and buy/sell points are the “flesh.”

Pattern (Fenxing) marks market nodes. When three consecutive candles are involved, the middle one forming a top pattern (highest point) or bottom pattern (lowest point) creates a pattern. Patterns are crucial for judging whether a trend is effectively reversing.

There are two types: Intermediate (Zhongji) and Standard (Biaozhun). Intermediate patterns do not generate new segments; the trend continues. Standard patterns generate new segments, indicating a trend reversal. Judging pattern types involves observing whether lower-level trends show consolidation divergence and whether key support/resistance levels are broken or held.

Divergence signals trend exhaustion. Within the same level, two trends in the same direction, with the latter weaker than the former, form divergence. Usually shown as: price makes a new high but indicator does not (high divergence), or price makes a new low but indicator does not (low divergence).

But divergence judgment isn’t just MACD’s green/red bars; it requires checking if the lines truly diverge and if consolidation divergence exists. Many rely only on superficial appearances, leading to “diverged and still diverging” situations.

Buy/Sell points are execution moments. The first buy point appears at the end of a downtrend, often with divergence; the second at the boundary of the central, when the trend stabilizes; the third is riskier, as the market tests new support. Sell points follow similar logic in reverse.

These three defensive lines verify each other; only when multiple signals align do the signals become most reliable.

Moving Averages and Trading Rhythm

Chánlùn’s understanding of moving averages differs from traditional views. It’s not just simple averages but the area formed by their intersections to gauge trend strength and divergence.

For example, with the 5-day (short-term) and 10-day (long-term) moving averages, their relative positions determine market nature: “Female above” (5-day above 10-day) indicates bullish; “Male above” (10-day above 5-day) indicates bearish.

The closeness of these lines indicates trend strength:

• Kiss: Price breaks short-term MA but not long-term MA—strong trend facing resistance
• Lip kiss: Price breaks long-term MA then quickly falls back—moderate strength
• Wet kiss: Price repeatedly hovers around long-term MA—weakest, most likely to turn

Using the “closeness” of MAs, traders can intuitively sense market strength and adjust strategies accordingly.

Risk Rating System in Practice

Chánlùn offers a complete risk rating system, allowing traders to assess risk before entering.

Using daily and weekly charts, each market state is precisely defined:

Downtrend risk levels:

• ++++ (highest): Daily and weekly both downward
• +++: Daily downward, weekly bottom pattern
• ++: Daily bottom pattern, weekly downward
• +: Both bottom pattern

Similarly for uptrends, with opposite risk implications.

Operational implications:

• In highest risk, even experts should wait
• When low risk signals appear, actively participate
• In medium risk, proceed cautiously, only with multiple confirming signals

This system objectifies and quantifies risk management, making decisions less subjective.

Multi-Level Coordination: The 3D Trading Logic

Market truths often hide in interactions across multiple timeframes. A seasoned trader masters multi-level coordination.

Two-level structure (e.g., weekly + daily) suits macro trend judgment. Three-level structure (e.g., daily + 30-min + 5-min) is better for short-term entries, confirming big trend with small-level precise points.

Core logic: Use higher levels to confirm direction, lower levels to find precise timing. For example, if daily confirms an uptrend, use 30-minute pattern to find pullback buy points; if divergence appears on 30-minute, confirm with 5-minute candles for effective entry/exit.

This multi-dimensional approach ensures decisions follow market laws rather than gambling on price movements.

Practical Pattern Application: Attention to Detail

Pattern judgment seems simple but is rich in detail.

First, pattern confirmation. Adjacent three candles require containment relationships until standard shapes are met. Also, the high of the middle candle in a bottom pattern must not exceed the high of the middle candle in a top pattern, and vice versa.

Second, support/resistance levels. For bottom patterns, support is the highest of the two side candles; for top patterns, support is the lowest. The middle candle’s price indicates the pattern’s position.

Third, level application. Use daily patterns for daily levels; if absent, check 60-minute. Similarly, use 5-minute patterns to assist 1-minute segments, and 30/60-minute patterns for 5-minute analysis.

Finally, actual validation standards:

• Bottom pattern: Confirm it holds above support; if it breaks and then re-tests, the end point must be below support, and subsequent candles must close above support.
• Top pattern: Confirm it breaks below support; if it rebounds, the end point must be above support, and subsequent candles close below.

Mastering these details determines success. Many understand the concept but falter in execution due to neglecting nuances.

Central Extension and Expansion: Trading Insights

The evolution of the central reflects market changes. Understanding various forms of central development is key.

Formation: The initial stable zone.

Extension: Continuous oscillation around an existing central, limited to no more than 9 segments; beyond that, it upgrades to a higher-level central. During extension, hold positions and use pattern signals for small trades.

New formation: Breakout of the central boundary signals a trend change; assess whether a new trend is forming or just a rebound.

Expansion: When oscillations around a central exceed 9 segments, the current central becomes part of a higher-level central—indicating a major market turning point.

Understanding these changes helps traders adjust strategies timely rather than passively waiting.

Precise Positioning of Buy/Sell Points

Chánlùn classifies buy/sell points into three types, each with distinct risk-reward profiles.

First type: Near trend end, often with divergence; high probability but requires early detection of trend exhaustion.

Second type: At the boundary of the central; trend is established, risk lower, and entries more reliable.

Third type: At higher-level pattern formations; risk is highest, often late in the move, and in weak markets, may not appear at all.

Professional traders typically focus on the first and second types, remaining cautious about the third, which often signals late-stage or risk signals rather than true entries.

Quantification and Rules: The Trading Advantage

The greatest strength of Chánlùn is its comprehensive, rule-based framework that can be programmed and systematized.

Advantages include:

• Elimination of emotion: Trading strictly by rules reduces greed and fear
• Controlled risk: Predefined stop-loss and target levels
• Backtesting: Rules can be tested on historical data
• Continuous improvement: Statistical analysis refines rules over time

This explains why Chánlùn applies across stocks, futures, forex, and crypto—because it studies the fundamental laws of market movement, not market-specific quirks.

Common Pitfalls and Practical Corrections

Many learners fall into typical errors:

Overemphasis on precision: Using smaller timeframes to chase more signals increases costs; choosing levels suited to capital and psychology is more important.

Ignoring levels: Levels are mandatory; neglecting them leads to flawed analysis.

Mechanical application: Rules are tools, not rigid formulas. Flexibility is needed, especially during black swan events.

Confusing central with pattern: The central is derived from strict trend definitions, not just visual resemblance. Mixing traditional patterns with Chánlùn can cause confusion.

Risk Management and Capital Allocation

Despite the power of Chánlùn, risk control remains paramount. Proper capital management safeguards profits.

Stop-loss principles: Based on invalidation levels—if entering on daily buy points, break of daily pattern signals should trigger stop-loss.

Position sizing: Adjust according to risk rating—full position in low risk, half in medium, cautious in high risk.

Gradual entry: Combining first, second, and third buy points allows pyramid-like scaling, reducing average costs and controlling risk.

Adapting to Different Market Conditions

Bull, bear, sideways—each requires tailored application.

In clear uptrends: Focus on small-level pullbacks for adding positions, with strict stop-losses, aiming to follow the trend.

In clear downtrends: Prioritize position control and patience; wait for major buy signals, while doing small trades with tight stops.

In sideways markets: Central extension becomes key; trade within the central boundaries, watch for expansion signals.

At turning points: Multi-level confirmation is critical; wait for multiple signals aligning before acting.

Final Reflection

The core of Chánlùn is: Markets are orderly; patterns are knowable; trading can be systematized. This contrasts sharply with impulsive, feeling-based approaches.

More profoundly, Chánlùn changes how we perceive markets. It reveals that price movements are governed by laws beyond human will. Recognizing and respecting these laws is the foundation of success.

Whether stocks, futures, or crypto—any freely traded market, the principles of Chánlùn are applicable. The key lies in each trader’s patience to deeply understand, disciplined execution, and flexible application based on real-time conditions.

Let’s strive together!