Chantong Practical System Breakdown: The Rules of Major Player Trading

The Chan Theory reveals the essence of the capital market, encoding the chaotic market trends into identifiable operating rules. This theoretical system is built on a rigorous axiomatic foundation, constructing a complete classification framework through a profound understanding of human weaknesses—greed, fear, obsession—deconstructing market trends from chaotic fluctuations. This article will comprehensively analyze how the Chan Theory guides traders to find certain buying and selling opportunities in the market from the dimensions of theoretical framework, core tools, and practical applications.

The Theoretical Foundation and Core Combinatorial Laws of the Chan Theory

The brilliance of the Chan Theory lies in its classification philosophy. Market trends may seem disorderly, but under the standards of segmenting and subdividing, everything becomes traceable. The core of this theory is the mutual constraint and operation of three combinatorial laws.

First Combinatorial Law: Inclusion K-Line Combination Law

The inclusion K-line combination is the starting point of the Chan Theory. In practical operations, traders can adopt the simplified inclusion K-line handling method proposed by the Chan Master, which is sufficient for most traders. This combinatorial law ensures that the relative positions of each K-line can be clearly defined.

Second Combinatorial Law: Pen Combination Law

The pen combination law is the foundation of the entire system. Without understanding this logic, the Chan Theory cannot be discussed. The definitions and combinations of pens determine the accuracy of trend segmentation and are the foundation for all subsequent operations.

Third Combinatorial Law: Trend Combination Law

The trend combination law is the most spectacular, mathematically aesthetic, and artistic part of the Chan Theory. It defines the recursive rules of trends: each level of trend is composed of at least three subordinate-level trends. This recursive structure achieves a complete classification of market trends, making the ultimate principle of “the trend will ultimately complete” possible—whether it is rising, falling, or consolidating, all trends must eventually complete, and the end of a rise must inevitably be the beginning of a fall.

Trend Decomposition: A Three-Dimensional Operating System of Centers, Types, and Levels

The core technology of the Chan Theory operating system consists of three interrelated elements: Center is the core of the trend, Trend Type is the classification of trends, and Level is the scale of the trend. Only by mastering these three dimensions simultaneously can one truly find the rhythm of operations in the market.

Definition and Variations of Trend Centers

The definition of a trend center is very strict: it is composed of the overlapping parts of at least three consecutive subordinate-level trend types within a certain level. Mathematically represented, if the high and low points of three consecutive subordinate-level trend types A, B, and C are a1a2, b1b2, c1c2, respectively, the center interval is (max(a2, b2, c2), min(a1, b1, c1)). In practical operations, this complexity is not necessary, as one can judge visually.

For example, a 5-minute center is formed as long as three 1-minute trend types overlap. Once a center is formed, it will undergo four types of changes:

1. Center Formation: Three consecutive subordinate-level trend types begin to overlap
2. Center Extension: Oscillation around the formed center, but extending no more than 9 subordinate-level trend types
3. Center Rebirth: Breaking through the center to form a new trend
4. Center Expansion: Extending beyond 9 segments and expanding to a higher level

Key Tip: To form a large-level center, there must first be fluctuations. Without fluctuations, there is no center extension or expansion. At the same time, all three of the first subordinate-level trend types must be completed to form the center of that level. This point is very clear on the subordinate-level chart and does not require looking at the details of the next level.

The Essential Difference Between Consolidation and Trend

Within the framework of the Chan Theory, consolidation and trends have strict definitions, completely different from traditional vague understandings:

• Consolidation: Any level of completed trend type only contains one center; regardless of how large the rise or fall is, as long as it returns to the center, it is considered consolidation. This means that the amplitude of consolidation is not necessarily smaller than that of a trend.
• Trend: A completed trend type must contain at least two or more sequentially aligned centers, and there is no overlap between centers in a trend. An upward trend is called a rise, and a downward trend is called a fall.

Distinguishing trend types is the key foundation of Chan Theory analysis. Only by accurately judging whether the current trend is consolidation or a trend can appropriate operational strategies be formulated.

Level: The Ultimate Dimension of Market Operations

The importance of levels is often overlooked by beginners, yet it is the most critical and fatal issue in the entire system. Levels practically solve the complete classification problem of all publicly free economic financial markets—allowing traders to make profitable trades based on their operational level and to navigate between various levels for three-dimensional operations.

The essence of levels is the difference in scale and quality. A fund of 1 million and a fund of 10,000 differ not only in scale but also fundamentally in the periods of intervention. The 10,000 may freely enter and exit at the 1-minute level, while the 1 million must consider at least the daily level, waiting for the “bottom type” to be established and the trend to clarify before entering.

In practical operations, one can roughly take 1 minute, 5 minutes, 30 minutes, daily, weekly, quarterly, monthly, and yearly as levels of progression, but they should not be rigidly corresponded. Sometimes, the combination of 15 minutes and 60 minutes is more intuitive and effective than the combination of 5 minutes and 30 minutes. The Chan Master repeatedly warns: eliminate “one-track” thinking.

When large levels are doing well, the fluctuations of small levels can be handled as oscillations or washouts. At this time, the inevitable choice is to hold stocks (or coins) primarily. If the skills are sufficient, small-level buying and selling points can be used to increase profits and reduce costs; if the skills are insufficient, it is best to hold stocks and wait for large-level selling points. After selling, patiently hold coins, not swayed by small-level fluctuations, and wait for large-level buying points. This cycle has no other way.

Divergence and Buying/Selling Points: Signal Identification of Opportunities and Risks

Divergence is the only basis for changing trend judgments. The Chan Master has said: all situations cannot escape the three principles of “sell on high divergence, buy on low divergence, and do not predict.” When holding stocks (or coins), enter at short-term buying points and exit at short-term selling points to continuously lower costs. In the market, cost is the most critical factor—so long as costs are continuously lowered, victory is assured.

Judging Standards and Pre-conditions for Divergence

Simply thinking that “new lows in stock prices with MACD green bars contracting or new highs in stock prices with red bars contracting” constitutes divergence is the most common mistake. In reality, divergence has many pre-conditions:

Pre-condition One: Confirming Trend Type

First, clarify whether the current trend is “a trend or consolidation.” For consolidation, use ab segments for strength comparison; for trends, it is a bit more complex, as divergence appears in the bc segment but does not mean the trend is complete, as there may be a downward shift in the center forming a third or fourth center.

Pre-condition Two: In-depth Observation of MACD Details

Simply looking at the red and green bars of MACD is far from enough; one must also observe the situation of the yellow and white lines, especially the yellow line. Generally, if two adjacent segments in the same direction show divergence in the yellow and white lines, it indicates that true divergence has occurred.

Pre-condition Three: Applying Moving Average Divergence

The Chan Master initially used “the area formed by the intersection of moving averages” as an intuitive method for judging divergence, which still holds significant value today. By comparing the sizes of the intersection areas of adjacent moving averages, one can judge trends and divergences.

Pre-condition Four: Identifying Divergence Features

When divergence occurs, it usually has the following characteristics: divergence segments appear in subordinate levels, the strength comparison value of divergence is relatively large, the red and green bars within the divergence segment are decreasing, and the yellow and white lines are approaching or even crossing the zero axis, with all indicators signaling buying and selling points.

Pre-condition Five: Confirming with the Lowest Level K-Line

Finally, the true establishment of divergence must be confirmed by the lowest level (e.g., 1-minute) segmentation.

The Operational Significance of Three Types of Buying/Selling Points

The Chan Theory defines a strict buying and selling point system, with different operational significance for buying and selling points at different levels:

• First Type of Buying Point: The downward trend is complete, and the new upward trend has just begun to form
• Second Type of Buying Point: A buying point during the upward process of a pullback, with minimal risk
• Third Type of Buying Point: A buying point for adding positions during an upward trend, with higher risk

The logic of determining selling points is entirely opposite. Mastering the judgment of buying and selling points is key to understanding the perfect theory behind them—the trend will eventually complete, and the completion of one direction must inevitably mark the beginning of another direction.

Moving Average Trend Strength: The Key Tool for Grasping Operational Rhythm

The Chan Theory uses moving averages as an auxiliary judgment tool, constructing a complete buying and selling system through the intersection of short-term and long-term moving averages. Taking the 5-day moving average (representing short-term trends) and the 10-day moving average (representing medium-term trends) as examples, one can observe their “position changes.”

Three States of Position Changes:

1. Bull Market Position: The 5-day moving average is above the 10-day moving average (referred to as the female upper position), indicating a bullish market
2. Bear Market Position: The 10-day moving average is above the 5-day moving average (referred to as the male upper position), indicating a bearish market
3. Mutual Entanglement: The two moving averages intertwine with each other

After mutual entanglement, two outcomes can evolve: continuation or reversal. For bulls, a successful female upper position represents a continuation of the bull market, while a failed male upper position represents a bearish rebound. The opposite is true for bears.

Three Types of Kisses represent different strengths of trends:

• Air Kiss: The short-term moving average breaks through the long-term moving average but cannot sustain, indicating a very strong trend with no resistance
• Lip Kiss: The short-term moving average breaks through the long-term moving average but immediately forms a trap, indicating an average trend with average resistance
• Wet Kiss: The short-term moving average and long-term moving average show repeated entanglement, indicating a very weak trend with sufficient resistance, where all reversals start from the wet kiss

Understanding moving average position changes allows for quick judgments of the current market environment, thus formulating appropriate operational strategies.

Practical Application of Segmentation: From Theory to Trade Execution

Segmentation is the most fundamental and easily understood tool in the Chan Theory. Segmentation is formed by three adjacent K-lines, where the middle K-line is at the highest point in the peak segmentation and the lowest point in the bottom segmentation.

Standardized Definition of Segmentation

Conditions for Segment Formation:

1. The two K-lines next to it must be processed in an inclusion relationship with the surrounding K-lines excluding the middle K-line until the standard shape is met
2. For two adjacent segments, the high point of the middle K-line in the bottom segmentation must not exceed the high point of the middle K-line in the peak segmentation; similarly, the low point of the middle K-line in the peak segmentation must not fall below the low point of the middle K-line in the bottom segmentation

Key Positions of Segmentation (self-defined):

• Support Position: Among the K-lines on both sides of the segmentation, the bottom segmentation is the highest point, and the peak segmentation is the lowest point
• Segmentation Position: The middle K-line of the segmentation, where the bottom segmentation is the lowest point and the peak segmentation is the highest point
• Level Application: Prioritize using daily segmentation; if daily segmentation has not formed, then use 60-minute segmentation, and so on.

Two Types of Segmentation and Their Substance

After segmentation is generated, the key question is: does a new pen emerge? This determines the type of segmentation:

• Continuation Segmentation: This segmentation shares K-lines with the next segmentation and does not produce a new pen
• Standard Segmentation: This segmentation does not share K-lines with the next segmentation and produces a new pen

The emergence of segmentation originates from the first and second types of buying/selling points in a subordinate-level trend. The distinction in adjustment strength is whether a consolidation divergence appears after the second type of buying point in the subordinate-level trend—if it does, the adjustment strength is not large, often resulting in a continuation segmentation; if not, the adjustment strength is large, and the time is long, essentially extending into a new pen.

Segmentation Judgment for Short- to Medium-Term Operations

Conditions for Confirming New Pen Formation:

For bottom segmentation, confirm effective establishment above the support position: after breaking through the support position upwards, a pullback occurs, with the ending point lower than the support position K-line, and the subsequent K-line must close above this position.

For peak segmentation, confirm effective breaking below the support position: after breaking down through the support position, a pullback occurs, with the ending point higher than the support position K-line, and the subsequent K-line must close below this position.

Conditions for Confirming No New Pen Emergence:

For bottom segmentation, if it cannot effectively establish above the support position, it produces a peak segmentation and ultimately breaks through the lowest point of the segmentation.

For peak segmentation, if it cannot effectively break below the support position, it produces a bottom segmentation and ultimately breaks through the highest point of the segmentation.

Three Methods for Auxiliary Judgment of Segmentation

Method One: Judgment of Subordinate-Level Trends

• After the second type of buying/selling point, if divergence occurs, it is generally a continuation segmentation
• After the second type of buying/selling point, if no divergence occurs, it is generally a standard segmentation

Method Two: Judgment of Same-Level 5-Day Line

• An effective breakdown often indicates a standard segmentation
• An ineffective breakdown generally indicates a continuation segmentation

Method Three: Comprehensive Application The above two methods must be used in combination. Furthermore, if the segmentation (daily) encompasses subordinate-level trends that appear as third-type buying/selling points, it is almost certain to form a standard segmentation, generating a new pen.

Practical Operations After Segmentation Formation

Bottom Segmentation Operation Process

The operation steps after bottom segmentation appears are as follows:

1. Look for the support position of this bottom segmentation
2. Confirm that the segmentation extends to establish a pen: after the K-line following the segmentation breaks through the support position and closes above this position, the subsequent K-line falls below the position but the next K-line must close above this support position (no effective breakdown)
3. If the support position is effectively broken, exit, as the segmentation is essentially a continuation segmentation, and the trend will continue seeking a bottom
4. Auxiliary judgment method: combine with subordinate-level trends; if a top divergence occurs and high-level K-lines cannot return to the support position, then choose to exit high; if the 5-day line at this level cannot effectively hold, then also choose to exit high

Top Segmentation Operation Process

The operation steps after top segmentation appears are as follows:

1. Look for the support position of this top segmentation
2. Confirm that the segmentation cannot produce a new pen: the K-line following the segmentation cannot effectively break below the support position
3. If the support position is effectively broken, exit, as the top segmentation will likely extend into a new downward pen
4. Auxiliary judgment method: if a second-type selling point of subordinate-level trends appears followed by a consolidation bottom divergence, then the possibility of this top segmentation being a continuation segmentation is greater; if the 5-day line cannot effectively break down, then the possibility of not producing a new downward pen is greater

Combined Operation of High and Low Level Segmentation

Once a daily bottom segmentation is established, use the support position of this segmentation as a reference to observe whether a 60-minute top segmentation appears. If none appears, continue holding; if it does appear, observe whether the trend effectively breaks below the support position of this 60-minute top segmentation, and if a pullback cannot hold above the daily support position, decisively exit, as this daily bottom segmentation is essentially a continuation segmentation.

Key Points for Daily and Weekly Segmentation Operations

Buying and selling should occur on the day the segmentation is established, not after it is completely formed:

1. For the previous day’s high point (generally the first type of buying/selling point), sell if the price cannot reach a high on that day (generally the second type of buying/selling point)
2. Wait for the segmentation to be fully established, observing whether subordinate-level trends show consolidation divergence, and whether they break below the 5-day line
3. If there is consolidation divergence and no effective breakdown below the 5-day line, decisively replenish
4. If there is no consolidation divergence, wait for a drop below the 5-day line followed by consolidation divergence to replenish
5. If the top segmentation encompasses subordinate-level trends that generate a third-type selling point, a new pen will definitely be created; wait for the bottom segmentation to appear before replenishing (the process for bottom segmentation operation is the opposite)

The Interrelationship and Application of the Chan Theory’s Multiple Structures

Definition of Four Basic States

The Chan Theory encodes trends into states represented by number pairs:

• Bottom Segmentation: [-1, 0]
• Top Segmentation: [1, 0]
• Upward Pen: [1, 1]
• Downward Pen: [-1, 1]

Transition Rules Between States

There are strict transition logics between these four states, ensuring the traceability of trends:

• [-1, 0] can only connect to [1, 1] or [-1, 0], cannot connect to [1, 0]
• [1, 0] can only connect to [-1, 0] or [1, 0], cannot connect to [-1, 1]
• [1, 1] can only connect to [1, 0], cannot connect to [-1, 0] or [-1, 1]
• [-1, 1] can only connect to [-1, 0], cannot connect to [1, 0] or [1, 1]

Practical Application of Multiple Levels

One can adopt a multi-level application scheme:

Normal Trend Description: Use a dual structure (weekly, daily)
Normal Short-Term Operation: Use a triple structure (5 minutes, 30 minutes, daily) or other combinations

Operational Risk Rating System

Downtrend Risk Levels (using daily and weekly dual structure):

• ----: Daily [-1, 1], Weekly [-1, 1] (highest risk)
• —: Daily [-1, 1], Weekly [-1, 0]
• –: Daily [-1, 0], Weekly [-1, 1]
• -: Daily [-1, 0], Weekly [-1, 0] (lowest risk)

The more dashes, the higher the operational risk; even in the worst case, only highly skilled traders should operate.

Uptrend Risk Levels:

• ++++: Daily [1, 1], Weekly [1, 1] (lowest risk)
• +++: Daily [1, 1], Weekly [1, 0]
• ++: Daily [1, 0], Weekly [1, 1]
• +: Daily [1, 0], Weekly [1, 0] (highest risk)

The more plus signs, the lower the risk; in the worst case, one should exit and wait.

Practical Application of Risk Levels

Observe the daily and weekly states and decide:

1. If [-1, 1], do not participate; wait for [-1, 0]
2. If [1, 0], wait until [1, 1] and [-1, 0] appear
3. If [-1, 0], consider going long
4. If [1, 1], consider going long

The Complete Operational Framework

Level Selection

Using 30-minute as the main operational level:

1. Buying at the 30-minute level, then selling signals are derived from 5-minute signals
2. Enter at the end of the daily downward pen, then judge the downward divergence segment of the 5-minute trend, and find the first buy point on the 1-minute trend
3. If missed, enter at the second buy point
4. In weak markets, the third buy point on the 1-minute level carries huge systematic risk and should be avoided; the third buy point on the 5-minute level is rarely seen, and if it appears, it is often a second sell point, indicating a center-level expansion

Boundary Conditions

When executing trades, set clear boundary conditions:

1. The Role of the 30-Minute Framework: Pay close attention to its red and green bars and the yellow and white lines, which serve as the framework for 5-minute and 1-minute trend types
2. Minimum Number of Pens: At least three pens should appear in 30 minutes; if the first center appears, there must be five pens; the second pen can reduce positions, and the second buy can replenish
3. Reading Pen Strength: The strength of the 30-minute pen can be read from 5-minute or 15-minute levels
4. When Unable to Judge: If the 1-minute and 5-minute trend types are unclear, rely directly on the 30-minute red and green bars and yellow and white lines
5. Resonance Points: When multiple indicators issue buy/sell signals at the same price, this is called a “resonance point,” which is highly effective and indicates large price fluctuations; using interval sets to find optimal buy points is more effective
6. Weak Market Risk Management: In weak markets, when gains reach 30%, the main force may sell at any time; do not believe in the “value investment” claims of institutional speculators
7. Application of the Equilibrium Line: Pay attention to the color changes of the AB equilibrium line and its intersection with moving averages; when the 30-minute moving average merges with the equilibrium line to form a golden cross, it is the best entry point; if the 5-minute moving average crosses below the equilibrium line, it is time to sell, as the equilibrium line acts as support and resistance

The Ultimate Truth and Application Realm of the Chan Theory System

The Chan Theory is the first in human history to establish the trading market on a rigorous axiomatic system. It restores the true nature of the capital market, exposing human greed, fear, and obsession.

The system’s ultimate goal is to help traders clearly recognize the current behavioral state of the market. Only by understanding the current market behavior can participants gradually resolve the psychological traps of greed and fear. The Chan Theory constructs trading actions on a solid realistic foundation, not based on speculation driven by greed and fear.

Four levels of core philosophy:

1. Theoretical level: A complete classification system built on three combinatorial laws
2. Tools level: Quantifiable tools such as segmentation, pens, segments, centers, and trend types
3. Application level: Specific trading signals like buy/sell points, divergences, and levels
4. Philosophical level: The trend will ultimately complete, classification is the greatest truth, and a fully capable scientific classification theory is complete

Understanding the Chan Theory is not about memorizing formulas, but about deeply grasping its classification philosophy—market disorder can be transformed into order through rules; chaotic trends can be encoded into clear operational rules. This is the deepest insight into the essence of financial markets.

Through systematic application of the Chan Theory, traders can free themselves from the misconception of predicting or guessing the market direction, focusing instead on clearly identifying the current trend state and executing trades at certain, confirmed buy and sell points. This transition from “worrying about losses” to “knowing when the risk is minimal” marks a higher level of trading mastery. Let us encourage each other!