The Theory of Chaos restores the true face of the capital market, leaving human greed and fear nowhere to hide.
What is the use of the Chaos Theory? It fully understands the greed, anger, and ignorance of human nature, and constructs a set of rules to completely encode and deconstruct market trends.
Deconstruction: After the trend is formed, as the time level grows, the expanded trend is decomposed into various small units - trend types of the same level. At the same time, the market opportunities - buying points, risks - selling points are analyzed.
After all, coming to the market is for the transaction of buying and selling. You need to find the opportunity to buy and sell, just like butchering an ox. Which joint should you cut? In order to see the emergence of opportunities and risks, products under the rules of formation, pen, line segment, center, trend type, divergence, buying and selling points are constructed.
Since it is a rule, there are boundaries, so the boundary conditions become signals of opportunities and risks. Since there are boundaries, they can be quantified, so the Chaos Theory can use the rules to build a quantitative trading system.
Coding: It transforms disordered market trends into orderly ones through rules, allowing you to see the trends as clearly as your own palm lines. It is like a bunch of people standing in disorder, and we form teams for easy identification, management, and use.
1️⃣The core and essence of the Chaos Theory
The core of the Chaos Theory is a few associative laws. When the trend reaches a certain level, these associative laws make the possible completion of a trend "extremely clear and narrow". Therefore, only by learning the associative laws well can you make great efforts in judging the trend.
The essence of the Chaos Theory lies in "trends will eventually be perfect". The trend will eventually be perfect, which theoretically solves all open and free economic financial and securities markets, and all trends can be accurately positioned.
🟨There are three associative laws related to the Chaos Theory:
1. Contains the K-line pattern combination law; Contains the K-line pattern combination law. It is enough to take a shortcut and follow the simple K-line processing of Master Chan.
2. The law of pen combination: The law of pen combination is the most basic. Without understanding the law of pen combination, there is no way to talk about the Chaos Theory.
3. Trend combination law: The above two combination laws are the first part of the trend definition, the starting function A0=f1(B). The trend combination law is the second part of the trend definition, the recursive function An=f2(An-1). Of course, the trend combination law f2 is the must-read and must-talk about trend. This is also the most exciting, mathematical and artistic part of the Chaos Theory.
2️⃣The core technology of the Chaos Theory operating system
Master Chan said: The rhythm of operation is the most important. Operation, in the final analysis, is to buy at the buying point and sell at the selling point. The rhythm comes from a clear understanding of the level. Without the level, any buying and selling points are useless, let alone the rhythm. Master Chan said: Grasp the center of the center, the trend type and the level are the two basic points, and the rest are auxiliary.
Therefore, the three major analysis techniques of the Chaos Theory, "center, trend type, and level", are used to assist in judging "divergence" and several indicators of "moving average trend strength, volume-price relationship entry and exit" to confirm the first, second, and third buying and selling points. This is the core technology that constitutes the Chaos Theory operating system.
🟨Chanzhongshuochan trend center
Trend center:
The part of a certain level of trend type that is overlapped by at least three consecutive sub-level trend types. The specific calculation is based on the overlap of the first three consecutive sub-levels. The strict formula can be expressed as follows: the high and low points of the three consecutive sub-level trend types A, B, and C are a1a2, b1b2, and c1c2 respectively. Then, the interval of the center is (max (a2, b2, c2), min (a1, b1, c1)). In fact, it can be visually estimated, and it doesn't need to be so complicated.
For example:
A 5-minute center can be formed as long as three 1-minute trend types overlap. The types of trend centers are divided into: 1. Center formation; 2. Center extension (oscillation); 3. Center regeneration; 4. Center expansion
In short:
1. Central formation: a certain level of trend type is overlapped by at least three consecutive sub-level trend types;
2. Central extension: The extension of the central oscillation formed around the center cannot exceed 9 sub-levels, otherwise it will become a larger level;
3. New central axis: that is, the formation of trend;
4. Central expansion: When the central oscillation exceeds 9 segments, it will expand to a higher level central axis.
🚨Note
1. To form a large-scale center, there must first be fluctuations. Without fluctuations, there will be no problem of expansion or extension.
2. The first three trend types of the sub-level must be completed to constitute the trend center of this level. The completed trend types are very obvious on the sub-level chart, and there is no need to look at the charts of the levels below the sub-level.
In other words, the trend center is composed of at least three overlapping parts of consecutive sub-level trend types. There is a recursive problem here, that is, the level cannot go on infinitely.
In practice, for the last level that cannot be decomposed, its trend center cannot be defined as "the overlap of at least three consecutive sub-level trend types", but as the overlapping part of at least three unit K-lines of this level. Generally speaking, for actual operations, this lowest indecomposable level is set to 1 minute or 5 minute line. Of course, it can also be set to 1 second line, but there is not much difference.
Consolidation: In any trend at any level, a completed trend type contains only one trend center, which is called consolidation at that level.
Trend: In any trend at any level, a completed trend type contains at least two or more trend centers in the same direction, which is called the trend at that level. The upward direction is called rising, and the downward direction is called falling. Note that there must be absolutely no overlap between the trend centers in the trend.
🟨Trend type
Distinguishing "trend types" is the key to the analysis technology of the Chaos Theory and the basis of analysis. Under the rules of the Chaos Theory, trends are classified into different levels, namely "trend and consolidation" (trends are divided into "upward and downward"). Consolidation is different from the traditional general term and has a strict definition. A trend can only be formed when there are at least two "centers"; if there is only one "center", it is defined as consolidation. As long as the sub-level trend type returns to the center each time, no matter how large the amplitude is, it is regarded as a "consolidation" trend. Therefore, the rise and fall of consolidation is not necessarily smaller than the trend. This must be understood.
Trend types have levels. Generally, the 1F 5F 30F daily, weekly, quarterly, monthly and annual cycles set in the software are set as corresponding upper and lower level relationships, but this is not necessarily the case in reality. The strictly corresponding level relationship is recursively derived from "tick-by-tick transactions", but this is very tiring and unnecessary. It is better to use the cycles set by the software in the simplest way.
According to the prerequisite that "the trend type of this level is composed of at least three sub-level trend types", we can manually correct the pens and segments given by the pen-segment formula. Sometimes, 5F and 30F do not necessarily correspond up and down, but 5F and 15F correspond, so use the latter. The key is that 15F 30F ends the previous trend type earlier and more intuitively, which is more conducive to the judgment of the current trend.
🟨The essence of the Chaos Theory is that "the trend is ultimately perfect", which has two meanings:
1. Whether it is an up, down or consolidation trend, it will eventually end.
2. The end of the rise must be the beginning of the fall. This is very inspiring: when the falling trend type ends, it is also the best buying point, which Chan calls the "first buying point!" The key is how to judge the end of the previous falling trend?
🟨Master Chan uses standardized formulas to guide us in analysis:
Trend a+A+b+B+c, consolidation a+A+b. The divergence strength of the bc segment in the same direction and the divergence strength of the ab segment in the same direction are the only basis for judging the end of the trend type. Because of the AB center, there is a way to judge the direction of the trend. The definition of "trend center" is: composed of at least three overlapping parts of sub-level trend types.
Generally speaking, a daily line can always form three strokes on 30F. If not, the three strokes can be re-drawn depending on whether the yellow and white lines cross the O axis.
3️⃣ Level
The subtlety of the Chaos Theory lies in the level. In reality, the level solves the problem that all open and free economic financial and securities markets can be fully classified and operated. That is, you can make profitable transactions according to your own operation level, or you can move between various trend levels and conduct all-round three-dimensional operations.
"Level" is often a problem that people who just started to learn the Chaos Theory easily overlook. Many people who doubt the Chaos Theory are actually people who have forgotten or have not paid enough attention to it, but this problem is the most critical and fatal problem. For the so-called no level, no direction, the big level (annual line, weekly line, daily line) is the big direction, and the small level (60F, 30F, 15F, 5F) is the local, the details, and the small direction.
When the big level is going upward, the small level fluctuations can be handled by shock and chip washing. At this time, the inevitable choice is to hold stocks (coins) as the main thing. If the technology allows, use small-level buying and selling points to increase profits and reduce costs; if the technology is not good, you can only hold stocks (coins) with peace of mind, otherwise there is a risk of losing chips by using small-level buying and selling points, waiting for the arrival of large-level selling points. After selling, hold the coins patiently, don't be tempted by small-level fluctuations, wait for the arrival of large-level buying points, and so on. There is no other way.
"Level" is determined by the amount of funds, personality, and systemic risk. Master Chan believes that level is like the axiom of geometry and does not need to be defined. In fact, level is everywhere. The essence of level is the size and quality difference. In addition to the size difference, 1 million and 10,000 also differ in the period of intervention. 10,000 may enter and exit freely at the 1F level, while 1 million must consider at least the establishment of the daily "bottom pattern" and the trend is clear before intervention.
There are levels for trend types, divergences, funds, operations, and buying and selling. In layman's terms, the level should be "reclassification after classification". The idea of classification runs through the entire process of the Chaos Theory and is the soul of the Chaos Theory. Master Chaos once said that many people are obsessed with the God-like imaginary theory, but they don't know that the simplest classification is the greatest truth. The theory that can be scientifically and completely classified is definitely a complete theory.
You can roughly consider 1F 5F 30F daily, weekly, seasonal, monthly and annual cycles as level upgrades, but as mentioned before, they should also correspond rigidly. In fact, sometimes 15F 60F is a good auxiliary judgment. Master Chan repeatedly warned that stock (cryptocurrency) speculation should avoid "single-minded" thinking.
4️⃣Auxiliary judgment of trend type
🟨Divergence
Master Chan said: In all situations, you cannot escape from selling at high divergence and buying at low divergence. Do not predict. If you have stocks (currency), enter at the short-term buying point and exit at the short-term selling point. This will reduce the cost. In the market, cost is the most critical. As long as the cost keeps decreasing, you will be invincible.
"Divergence" is the only basis for changing the trend judgment. The comprehensive application of the three is the "worry but not worry" of stock (cryptocurrency) speculation. The three are interrelated, not separate. The end of a certain level of trend type must be caused by divergence. Trend types are divided into levels. Small-level divergence may lead to a large-level turning point. The first, second, and third buying and selling points formed at different levels have different operational significance.
Master Chan has no definition of "divergence", which is mostly based on experience, but he said that MACD has a high accuracy rate in assisting the judgment of divergence, which is enough to deal with general situations. I often find that MACD sometimes cannot fully reflect divergence. This is no wonder. Master Chan said that the trend is the combined force of many forces, among which the policy force is very strong in a certain period. The V-shaped reversal caused by the suddenness of this force, such as the adjustment of "stamp duty", cannot be covered by only one indicator. But this situation is very rare.
Simply taking "the stock price (currency price) reaches a new low while the green column closes or the stock price reaches a new high while the red column closes" as a divergence, many people sigh "divergence after divergence, the divergence is still the same". In fact, there are many conditions for "divergence".
(1). First, we must confirm whether the trend is "trend or consolidation". For consolidation, we compare the strength of the ab pair; for trend, it is more complicated. The divergence between the bc segment does not mean that the trend is perfect, because the center may move down to form the third or fourth center.
(2) It is not enough to just look at the red and green bars of MACD. You also need to look at the yellow and white lines [especially the yellow line]. Generally speaking, a divergence between the yellow and white lines in the same direction indicates a true divergence.
(3) Master Chan originally used the “area formed by the intersection of moving averages” as an intuitive way to judge divergence, and it still seems to have value today.
(4). Generally speaking, divergence has the following characteristics: a divergence segment appears at a certain level; the divergence strength comparison value is large; the red and green columns decrease in the divergence segment; the yellow and white lines move closer to the O axis and may break through; various indicators indicate buying and selling points;
(5). Finally, it is confirmed by the pen pattern of 1F.
🟨Moving average trend strength
The strength of the moving average trend in the Chaos Theory is composed of the area formed by the intersection of the short-term moving average and the long-term moving average. That is, the trend and divergence are judged by comparing the sizes of the "area formed by the intersection of the two adjacent moving averages".
1) There are only three operability modes for stocks (currencies): buy, sell, and hold. The 5-day moving average (female on top) and 10-day moving average (male on top) of stocks constitute a buying and selling system.
a. The changes in body positions constitute a complete classification: the woman on top is like a bull, the man on top is like a bear, and they are entangled with each other.
b. After being entangled with each other, it evolves into two results: woman on top or man on top, the nature is: relay or transition
c. For the long side, the woman succeeds in taking the top position but the man fails. For the short side, the woman fails in taking the top position but the man succeeds.
d. The last entanglement divergence of the male on top forms a short trap. This is a buy.
e. The low position formed by the first entanglement and pullback of the woman on top is the second buy, and the risk is the lowest at this time.
f. The nature of the two buying points: the female on top position is followed by a relay (the female continues to be on top), the male on top position is followed by a turning point (from the male on top to the female on top), and the selling point is the opposite
2) The way to judge whether it is a relay or a turning point after the entanglement is to start from the kiss
The creation of a kiss:
a. At the same level, when the trend breaks through the short-term moving average (5 days) but fails to break through the long-term moving average (10 days), it is called a flying kiss. There is no ability to resist, and the trend is very strong.
b. At the same level, when the short-term moving average (5 days) breaks through the long-term moving average (10 days), a trap called a lip kiss is immediately formed. The resistance is average and the trend is average.
c. At the same level, when the trend breaks through the long-term moving average, the repeated entanglement of the line is called a wet kiss. There is enough resistance, the trend is very weak, and all turning points start from a wet kiss.
5️⃣Chan Theory Operation Procedure
According to the above understanding of the Chaos Theory, the following operating procedures are set up: using the center and trend type on the low-level chart, and using the classification and line segments on the high-level chart, which is equivalent to having two sets of useful tools to analyze the same trend, which is a great thing.
🟨Applicable levels
(1) If you buy 30F, you will sell the next level 5F.
The daily trend intervenes at the end point of the downward stroke, that is, after judging the downward divergence segment of the 5F trend type, the divergence segment is judged again in the 1F trend type to find the first buying point. If the first buying point is missed, intervene at the second buying point. In the current weak market, the third buying point of 1F has huge systemic risks and is not suitable for operation, while the third buying point of 5F is almost invisible. If it appears, it is often the second selling point to form the level expansion of the center.
(2) Setting of several boundary conditions:
a. 30F is between the daily line and 5F. Pay special attention to the changes in the red and green columns and the yellow and white lines as the framework of the 5F and 1F trend types.
b. There must be at least three 30Fs. If the first center appears, there must be five. The second one can reduce the position and the second buy point can make up for it.
c. The pen strength of 30F can be read on 5F or 15F.
d. If you can’t understand the 1F5F trend type, it can be directly determined by the 30F red and green columns and the yellow and white lines.
e. When all indicators send out buy and sell signals at the same price, it is called "resonance point", which is very effective and also means that there will be a large rise and fall. It is more effective to use interval sets to find the best buying point.
f. In a weak market, the main force may sell at any time even if the increase reaches 30%. Don't believe the nonsense of "value investment" of institutional speculators.
g. Pay attention to the color changes of the balance line AB and its intersection and separation with the moving average.
The best and safest entry point is when the 30F moving average and the balance line are bonded to form a golden cross; and when the 5F moving average crosses the balance line, it is time to sell. The balance line has support and pressure effects. Of course, these judgments are based on the judgment of the trend type.
6️⃣Summary of the operation of Chaos Theory
🟨Type:
It is composed of three adjacent K-lines. The middle K-line has the highest high and low points when it is a top pattern, and the highest high and the lowest low points when it is a low pattern.
🟨Conditions for classification
(1) The two K-lines next to each other need to be included in the surrounding K-lines except the middle K-line until the standard shape is met;
(2) For two adjacent formations, the high point of the middle K-line of the bottom formation cannot be higher than the high point of the middle K-line of the top formation. Similarly, the low point of the middle K-line of the top formation cannot be lower than the low point of the middle K-line of the bottom formation.
🟨Key points of classification (own definition)
(1) Support position: Among the candlesticks on both sides of the pattern, the bottom pattern is the highest point and the top pattern is the lowest point;
(2) Position of the bifurcation: The middle K-line of the bifurcation, the bottom bifurcation is the lowest point, and the top bifurcation is the highest point;
(3) If there is a daily pattern, the daily pattern will be the main one. If there is no daily pattern, the 60-minute pattern will be the main one, and so on.
(4) Popularized usage: Use 5F pattern to assist in determining the end of the 1F segment, and use 30F and 60F pattern to assist in determining the end of the 5F segment.
🟨Classification
(1) After a bifurcation is generated, whether or not a new pen is formed, another opposite bifurcation will be generated immediately, that is, a bottom bifurcation must be followed by a top bifurcation, and a top bifurcation must be followed by a bottom bifurcation;
(2) After a pattern is generated, the key issue faced is: will a new pen be generated?
a. Generate a new pen: Is there a common K-line between this pattern and the next pattern?
b. No new pen is generated: the K-line is shared between this pattern and the next pattern
🟨Classification
a. Relay type classification: no new pen is generated
b. Standard type classification: generate new pen
🟨Type essence
(1) The formation of the bifurcation is formed by the first and second buying and selling points of a certain small-scale trend;
(2) The difference in the intensity of the pattern adjustment: whether there is a consolidation divergence after the second type of buying and selling points in the small-scale trend
a. If there is, the adjustment is not strong, and it often generates a relay type of pattern
b. If not, the adjustment is strong and takes a long time, basically extending the new pen
🟨Correlation with the 5-day line
a. Conditions: The textbook uses 5-day and 5-week lines as examples; it should be applicable to the 60-minute and 30-minute levels.
b. Judgment key: whether the small-level trend shows consolidation divergence after the second type of buying and selling points. If so, it will generally not effectively fall below the 5-day line; if not, it will basically effectively fall below the 5-day line. Even if it does not fall below the 5-day line, it will have to trade time for space for a long time.
🟨Operational judgment
(1) Medium and short-term market conditions
Does A form a new pen?
a. For the bottom pattern, confirm that it effectively stands above the support position (that is, after breaking through the support position upward, there is a K-line with a lower end point than the support position after the pullback, and the next K-line must close above this position)
b. For the top pattern, confirm that the price has effectively fallen below the support position (that is, after falling below the support position, there is a K-line with a higher end point than the support position after the pullback, and the next K-line must close below this position)
B. Should we not form a new pen and continue the direction of the original pen?
a. For the bottom pattern, it cannot effectively stand at the support position, resulting in a top pattern, and finally breaking through the lowest point of the pattern.
b. For the top pattern, it cannot effectively fall below the support position, produce a bottom pattern, and finally break through the highest point of the pattern.
🟨Type-assisted judgment method
A. Small-level trend
a. The second type of buying and selling points followed by divergence are generally relay-type patterns.
b. The second type of buying and selling points without divergence is generally a standard type of pattern
B. 5-day line of the same level
a. If it breaks down effectively, it is often a standard pattern.
b. If the price does not break through effectively, it is generally a relay type pattern.
C. Description:
The above two methods must be used in combination
D. The third type of buying and selling points:
Small-level trends included in the pattern (daily line): If the third type of buying and selling points appear in the 1F or 5F trend, it is basically certain that a standard pattern will be formed, and a new pen will be generated.
🟨Combined judgment method of different levels of classification
A. After generating a daily bottom pattern, take the support position of the pattern as the key point:
a. After breaking through the support point, look at the secondary level pattern. When the 60-minute opposite pattern, i.e. the top pattern, is generated;
b. After breaking through the 60-minute bifurcation support position, if it cannot pull back to the daily bifurcation support position, the daily bifurcation will become a central bifurcation;
c. The 60-minute top pattern will generate a new pen;
d. When the 60-minute K-line rises and cannot pull back to the support position of the daily line pattern, it is the time to sell.
7️⃣Operation application
🟨Daily and weekly chart splitting operations
A. Buy and sell on the day the pattern is formed, not after it is fully formed. a. Target the high point of the previous day (generally the first type of buying and selling point), and sell when the high point fails to rise on the same day (generally the second type of buying and selling point)
b. Wait for the formation to be fully established, and observe whether the small-level trend shows consolidation divergence, and whether it falls below the 5-day line.
c. If there is a consolidation divergence and it does not effectively fall below the 5-day line, resolutely cover it
d. If there is no consolidation divergence, wait for a consolidation divergence to appear after falling below the 5-day line, and then cover the position.
e. If the top pattern contains a small-level trend to generate a third-type selling point, a new pen will be generated, and then the bottom pattern will appear before covering the position. Explanation: The bottom pattern operation is the opposite.
🟨Operational application after the formation of the classification
A. Key issues for long positions
a. After a top pattern is formed, can it be transformed into a relay pattern?
b. After the bottom pattern is formed, can it be confirmed as a standard pattern?
B. Bottom-type operation
a. After the bottom pattern appears, find the support position of the bottom pattern
b. Confirm that the extended stroke of the split is established: the K-line after the split breaks through the support position and closes above the support position. After the following K-line falls below the position, the next K-line closes above the support level again (that is, there is no effective break).
c. If the price falls below the support level, exit the market.
Because the pattern is basically a relay pattern, the trend will continue to find the bottom.
d. Auxiliary judgment method
(a) Combined with the small-level trend to determine the effective support. If a top divergence occurs, and the high-level K-line cannot return to the support position, then exit at a high level;
(b) 5-day line: If the 5-day line of this level cannot hold effectively, you should also choose to exit at a high point.
🟨Top type operation
a. After the top pattern appears, look for the support position of the top pattern;
b. Confirm that the split cannot generate a new pen: the K-line after the split cannot effectively fall below the support position;
c. If the price effectively falls below the support level, you must exit the market, because the top pattern will basically extend a new downward stroke.
🟨Assisted judgment method
(a) If the second type of selling in the small-scale trend leads to a consolidation bottom divergence, then the top pattern is likely to be a relay pattern;
(b) 5-day line: If the price fails to break below the 5-day line, it is more likely that the price will not be able to generate a new downward trend.
G. High- and low-level classification combined operation
a. After a daily bottom pattern is established, the support position of the pattern shall prevail.
b. Observe whether there is a 60-minute top pattern. If not, hold on.
c. If it appears, see if the trend effectively falls below the 60-minute top support position, and if there is no hope of pulling back to stand above the daily support position, then resolutely exit, because the daily bottom pattern is basically a relay pattern
8️⃣The internal and external relationship and application of the multiple structures of the trend
🟨State Definition
Bottom type: [-1, 0]
Top type: [1, 0]
Up pen: [1, 1]
Down pen: [-1, 1]
🟨Relationship between states
After [-1, 0]: can only be connected to [1, 1], [-1, 0], not [1, 0]
After [1, 0]: can only be connected to [-1, 0], [1, 0], not [-1, 0]
After [1, 1], you can only connect to [1, 0], not [-1, 0] or [-1, 1]
After [-1, 1], you can only connect to [-1, 0], not [1, 0] or [1, 1]
🟨Level Application:
Multiple levels can be adopted, such as triple: weekly, daily, 30 minutes:
(1) The general state of describing the trend can be divided into two structures: weekly and daily
(2) Ordinary short-term operations can adopt a triple structure: such as 5 minutes, 30 minutes, and daily lines.
(The dual structure of daily and weekly lines)
🟨Operational risk rating for a downtrend
---- : Daily line [-1, 1], Weekly line [-1, 1]
--- : Daily line [-1, 1], Weekly line [-1, 0]
-- ：Daily line [-1, 0], weekly line [-1, 1]
- ：Daily line [-1, 0], weekly line [-1, 0]
- The more numbers you have, the greater the risk of operation. Even the worst technical experts don’t operate.
(The dual structure of daily and weekly lines)
🟨An operational risk rating for an upward trend
++++: daily line [1, 1], weekly line [1, 1]
+++ : Daily line [1, 1], Weekly line [1, 0]
++ : daily line [1, 0], weekly line [1, 1]
+ ：Daily line [1, 0], weekly line [1, 0]
The more + signs there are, the lower the risk of operation. Even the worst case scenario is to exit and wait and see.
🟨Application in operation:
Observe the status of the daily and weekly lines——
(1) [-1, 1], do not participate, wait for [-1, 0] to appear
(2) [1, 0], observe until [1, 1] and [-1, 0] appear
(3) [-1, 0], can participate
(4) [1, 1], can participate
The theory of Chanzhongshuochan is the first theory in human history to build a trading market on a strict axiomatic system. It restores the true face of the capital market and exposes human greed and fear.
Only when participants in the capital market clearly know the current behavior of the market can they gradually resolve greed and fear. The theory of Chanzhongshuochan is to build trading behavior on a solid realistic foundation, rather than on speculation caused by greed and fear.
mutual encouragement!