I have always believed that technical analysis has three application stages, from low to high: 1. Determine the future trend direction 2. Predict short- and medium-term price targets 3. Study the trend operation path.
Most people only stay at the first stage, trying to spot the trend at the early stage of formation, and then trade in the direction of the trend until they confirm the reversal and exit to achieve their profit goal.
But this is not easy. During the period of volatility, the clear support and resistance of the range shapes our cognition, and psychologically creates a stereotype of "high" and "low" prices, which leads to insufficient reaction to changes in the long and short patterns when a breakthrough comes. Therefore, when we are novice, we always go high and low within the range and are dumbfounded when we see the trend.
It can be seen later that when the trend breaks through and moves unilaterally, the difficulty of trading is further increased in a highly volatile market. Although the direction is clear, the trend movement is not uniform, it is uncertain and reversals are frequent.
Therefore, they adhere to the correct position - trading with the trend, but they are actually buying and selling according to the trend, following the big positives and negatives, and their reaction is always one beat slower than the market.
Later I thought that it is human nature to seek benefits and avoid harm, and that people always have a natural fear of unknown possibilities.
In other words, we always try to see some kind of "certain" sign on the chart before taking action, and the K-line patterns we learned in the early stages are too in line with human nature. We all think that the market's buying and selling intentions will be expressed through K-line patterns. Large Yin and Yang can further stimulate trading intentions and promote larger trends.
And then there was nothing else. The N-shaped structure, breakthrough strategy, big K chasing orders, plus some trend-following bets, successfully made me younger and younger when I was a novice, and I went straight back to the time before liberation.
If you are a person who reviews market trends frequently, you will find that market trends cannot develop linearly in accordance with human intuition. In this way, no one will lose money. It always creates the illusion of continued skyrocketing when traders are enthusiastic, but behind the scenes it is a trap to kill bulls.
The reason for loss is not that your analysis is not reasonable enough, but that the transaction lacks foresight.
The formation of price trend is a fact but it has also become history. The breakthrough of heavy resistance is highly correlated with the trend, but it only conforms to technical logic, not the real law.
Because what determines whether a trend can develop further is not the reasoning on the chart, but its implicit momentum effect. For example, when breaking through resistance, the distance between the unilateral run and the starting position determines whether its kinetic energy is released.
If the price has been going one-way for a day before the breakthrough, with a drop of hundreds or thousands, then the momentum is naturally almost consumed. What if the price breaks through at the end of the daily K line? Is it more likely to be unstoppable or to be at the end of its strength? Just think about it and you will understand.
Of course, there is a second point. What you need to urgently figure out is where its short-term goal will be and how much profit margin there is, and then determine the transaction value and whether it is necessary to enter the market.
Some trends perform very strongly after a breakthrough, but they are not far from important nodes, so the profit margin is low and they are too useless.
Some friends directly look at the medium-term target after the breakthrough and enter short-term orders in the hope of getting big profits. However, the breakthrough point is not good, and the short-term target is not closed, so the orders are wiped out by the pullback.
If you lack planning for short-term/medium-term goals, it is easy to lose your trading rhythm in the trend. From the core principle, we should open positions close to the starting position of the stage trend and try to avoid entering the market at the tail end.
The starting position and target position are essentially our understanding of the price range. The earlier the timing, the greater the advantage, and the later the reaction, the greater the risk.
This is why I think it is extremely important to learn to divide trend structures. The identification of trading opportunities itself is dominated by our cognitive framework. We must establish a technical standard for dividing important nodes (supports and resistances) for ourselves in order to better understand the outbreak and exhaustion of trends.
It should also be noted that the resistance level is a "band-shaped" area, not a precise point.
When the trend runs to the vicinity of resistance, the willingness of participants to take profits and open reverse positions greatly increases. As a result, the trend may stabilize and turn back without touching the resistance level, or there may be no obvious momentum effect after breaking through the resistance, resulting in a false breakthrough and recovery at the end.
Whether it is the former or the latter, it is itself a clear evidence of the exhaustion of trend strength, but many friends only care about the take-profit point, but do not distinguish the strength of the momentum, resulting in the risk of profit taking or mindless order chasing.
A breakthrough strategy that conforms to human nature seems intuitive and easy to use, but what really determines its profit performance are the implicit conditions - the strength of momentum and changes in volatility; the blind spots in the public's thinking are often the source of profit for experts.
After all, determining the direction of the trend and estimating the price target are two different levels of things. It only takes three days to learn the technical concepts of determining the long and short trends, but it takes three years to study the application of trend structure and price targets based on the trend.
Only by raising your thinking to a higher level can you maintain competitiveness, which is commonly known as "dimensionality reduction attack"
In the past, when I saw fluctuations, I would think about the missed profits, and when I saw one-way movements, I would think about the breakthrough opportunities. Now, when I see fluctuations, I am more aware of its randomness, and when I see one-way movements, I mostly consider its trading difficulty.
The difficulty of trading for each type of trend is high or low. A perfect person can grasp it, but we have seven emotions and six desires and are far from being the “rational people” we imagined. The idea may be good, but it may be seven or eight points off when we make a move.
It can even be said that if the ability is 100, 40% on the execution side is good enough. The difficulty of entering the market and the difficulty of holding positions are the conditions that must be considered when formulating a trading plan.
For example, breakthrough logic relies on the division of trend structure and follows orders at important nodes to capture the momentum effect of trend breakthroughs. Its advantage is that it is more intuitive and concise, and emphasizes timing.
The technique is easy but the execution is not simple. First of all, there will not be too many important nodes in the trend, which means that you need to sacrifice a lot of space to get an entry opportunity, which is a big test of patience.
The loss of momentum may result in being too close to the short-term target. You may not be able to hold the position when you intervene on the same day. After all, the price has fallen so much during the day, and you have no point advantage. If you don't run, you will be beaten. This poses a problem for execution.
Therefore, many friends will choose to compress the daily line to intraday breakthrough, seeking more sensitive and advantageous intervention signals, trying to expand from point to surface, and use small-level breakthroughs to bet on the establishment of a large-level trend.
But frequent entry into the market during the day and excessive trading are the grave of retail investors.
The entry point is poor, and there is no advantage to withstand the pullback. The orders cannot be held and can only be entered repeatedly. From weak to strong to the middle and late stages of the trend with increased volatility, intervention will only become more difficult each time. The logic of following the trend is correct, but there are also many pullbacks.
I have also walked this path, and I used to comfort myself with reasons such as "trial and error with a light position", "trading is probability", and "accept small losses to make big profits".
But later I found that the winning rate of high-frequency trading was so low that "even if I can see the trend correctly, there is still a great possibility that I will lose money continuously in the trend", so I gave up decisively.
If you want to get rid of this path, you can only reverse the intuitive trading logic and rely on trend structure to plan ahead, predict how the trend will evolve, and then classify the high-value opportunities among them.
For example, there are two major principles for high-value breakthrough signals:
1. The resistance to be broken must be a node where the main force holds positions, that is, it must have the technical basis to produce a momentum effect.
2. When a breakthrough occurs, the trend must not be far from the starting position of the day, and there must be sufficient profit space in the short term, that is, to evaluate the profit and loss ratio and necessity of the breakthrough transaction.
If these two principles are violated, the outcome will basically not be very good. I don’t need to say much about what is most likely to happen in subjective trading.
At the same time, there are two major principles for high-value callback signals:
1. It must be clear that the correction trend is in an advantageous area. That is to say, you cannot just choose a resistance to open a position, or you cannot be impatient to enter the market as soon as the correction occurs. You must wait until the trend has completed a wave and has a sufficient correction/consolidation process.
2. In order to ensure effectiveness, the judgment on the completion of the rebound must be cross-verified based on the trend structure. For example, when the rebound reaches the end, the exhaustion should be judged by the trend status, which is not limited to some V-reversal, needle shadows, and resistance graphics.
The principle of cross-validation: Take the estimated pullback range resistance as a hypothetical target, and then use specific resistance graphics to verify the reliability of the hypothesis to obtain more objective opportunities.
Frankly speaking, the logic of opening a position after a pullback is not easy, but the difficulty means its core competitiveness. The more difficult a strategy is to imitate, the higher its scarcity will be, and naturally it will be difficult to be replaced by others.
So, having said this, I wonder if my friends can understand the deeper meaning. The essential structure of a trading strategy is the definition and quantification of certain market rules.
Only with a clear definition can a standardized graphical representation be summarized, and you can tell by just looking whether it complies with the principles.
Only with standardized graphics can we quantify, have a testing basis and a premise for repeated execution. Otherwise, the basis for the same logic will be different each time. You can follow the sideways trend in the hours today and the breakthrough of an important node tomorrow. Without a decision-making model, there will be no consistency.
Why do some people make money while others lose money in the same trend?
The core of the problem lies in the inequality of information. Novices always think about how to find the basis for entering the current transaction, while experts will think about how the trend will evolve and how the risk areas and advantage areas will be distributed.
Technical logic is easy to explain, but the differences in thinking levels are difficult to solve, so many people think that experts have mastered some rare trading techniques, but in fact, thinking less is a kind of original sin.
Lacking a self-consistent theoretical framework, the most frightening thing is not whether one’s thinking is right or wrong, but not knowing how to think at all.
Without sufficient inspiration, it is difficult to break the limitations of thinking. The daily ups and downs will dissipate all your inspiration in irregular trends. This dilemma will make your three views become vulgar and you will not be able to see the true value.
Therefore, I hope that all of us can humble ourselves, read more books and learn more, work hard to expand our own knowledge circle, and break down cognitive barriers.
I often say that when you open an account, you enter a "survival countdown". If you cannot get started within the specified time, the subsequent pressure and difficulty will increase exponentially with time. Once the thinking of losing money becomes solidified, it will be difficult to remain open and accept different viewpoints.
