Teaching You to Trade Stocks 63: Sorting Out the Basic Concepts for Everyone

2007/7/2 0:07:39

Been away a bit too long. No hotel, however good, beats home. Starting to miss Beijing a bit. I can head back to Beijing tomorrow. Still have a concert to attend on the 3rd. But I won't be in Beijing for long either—next week I have to go to Shenzhen again. My only hope is to catch the last of the lychee season—glutinous rice lychees, osmanthus-flavored ones, and such. You can't get good ones in Beijing; not sure if the season has passed already. Nothing to do anyway, so I'll casually write a lesson. Hope it helps everyone.

Establishing an object, especially a mathematical and geometric object, first requires proving its existence. If the thing you're talking about doesn't even exist, then what's there to discuss? For example, with objects like hubs or trend types: if you can't prove they necessarily exist, and moreover exist by level, then discussing them is meaningless. So the recursive definition of hubs given earlier is precisely to solve this problem—to solve the existence problem. In other words, hubs can be recursively defined, and this definition is operationally viable. The definition is actually a method for finding hubs—following this method, you can definitely find the hubs described in the definition.

However, mere existence definitions or theorems aren't very meaningful on their own. So-called operational viability is sometimes only idealized or mathematical. For example, you can prove that the prime factorization of natural numbers is unique, and you can design a very idealized search process for it, but in reality even the largest computers often can't complete it. Therefore, practical shortcuts are needed to facilitate real-world operations. By the same logic, for hubs and trend types, we have the study of charts at different levels. Otherwise, if we always start from the most primitive tick-by-tick transaction data to progressively define and search, that supposedly operational operation would have no operability whatsoever.

This leads to the analogy of microscopes at different magnifications. In practice, the most detailed chart generally available is the 1-minute level, so you can start from there. Of course, you can also start from 5-minute or even higher levels, but that's equivalent to reducing the microscope's magnification—naturally you'll see fewer things and less clearly than with the 1-minute chart. Let me emphasize again: the level of the chart has absolutely no necessary relationship with the level of the hub. Trend types and hubs are like objects under a microscope—they exist objectively. Their existence is guaranteed by the most primitive recursive definition mentioned above. Charts of different levels are like microscopes—different magnifications show different degrees of detail when viewing these objectively existing patterns. That's all there is to it. So don't confuse the microscope with what the microscope is observing.

If we first establish the microscope's magnification—say, we take the 1-minute chart as our most basic chart—then we can begin defining the fractals, strokes, line segments, etc., discussed in the previous lesson. With line segments, we can define 1-minute hubs, then 1-minute trend types, and then through recursive methods, progressively define 5-minute, 30-minute, daily, weekly, monthly, quarterly, and yearly hubs and trend types. Some people never understand this—for example, they keep asking how to read a 5-minute chart or a 30-minute chart. Actually, if you choose the 5-minute or 30-minute as your most basic chart, the reading method is exactly the same as for the 1-minute—it's just that your microscope magnification is lower, so things look coarser. And if you've already chosen the 1-minute chart as your most basic chart—that is, you've selected the 1-minute magnification microscope—then just look at the 1-minute chart. That's why this ID has been continuously marking line segments on 1-minute charts as demonstrations.

Now someone might ask: if using the 1-minute chart as the microscope, are 5-minute, 30-minute, and other charts still useful? Of course they are. For example, once a 1-minute trend type has been completed, you can mark it correspondingly on the 5-minute chart. The benefit of this is to aid memory—otherwise, when line segments on the 1-minute chart number in the thousands, you'd definitely go crazy. With 5-minute, 30-minute, daily charts, etc., you mark the corresponding completed trend types, and in practice, what you need to remember on the 1-minute chart is only the most recent incomplete 1-minute trend type. Of course, due to the multiplicity of decompositions, you actually need to know a bit more—this is just from the perspective of one decomposition. Another benefit is that when using MACD for auxiliary judgment, you don't need to add up areas of too many bars. You can look at the MACD on higher-level charts, making it clear at a glance. Daily-level divergence can actually be spotted on the 1-minute chart too, but you'd need to add up all the MACD values for the corresponding comparison segments, which is obviously impractical. So you can just look at the daily chart's MACD. There's nothing theoretically special about it—it's just for convenience. If you adjusted the MACD parameters on a 1-minute chart to be large enough, the effect would actually be the same, but in practice this is impossible since most software has upper limits on MACD parameters, which effectively means daily divergence can't be resolved using 1-minute charts.

Someone might ask again: why not mark 5-minute trend types on the 5-minute chart? Because marking sub-level trend types on higher-level charts has a benefit—it lets you clearly see how the hubs and trend types at that level are formed, making it more intuitive. Of course, if you want to mark 30-minute or even yearly trend types on a 5-minute chart, that's fine too—it's a matter of personal preference. If you have superhuman memory and analytical ability, you could even just mark everything on the 1-minute chart. And if you're even more impressive, with photographic memory and computer-like automatic classification and merging ability, then you wouldn't even need marks on the 1-minute chart.

Let me talk about something more practical. When most people face a stock, they don't start by looking at the 1-minute chart. They probably start with the daily chart, or even weekly, monthly, quarterly, or yearly. This is equivalent to first using a low-magnification microscope, or even the naked eye, for a preliminary look, and then switching to higher magnification for detailed observation. Therefore, for higher-level charts, the fractals, strokes, line segments, etc., from the previous lesson are equally useful. However, this observation is generally quick and not very detailed, so rough accuracy is sufficient. Moreover, once you've looked at enough charts, you don't need to follow the definitions step by step. For example, opening a daily chart, if you can't understand a stock's major trend within 1 second, you're too slow. Basically, once you've looked at enough charts and it becomes mechanical reflex, the moment you see a workable chart, it's like spotting a desirable boy toy—love at first sight. Scientific research says love at first sight takes less than 1 second. Stocks are like boy toys: if you can't fall in love at first sight within 1 second, this stock probably has no fate with you. At most it's fate without fortune—a fruitless struggle.

Don't think this ID's habit of constantly connecting stocks with boy toys is somewhat indecent. But the human body all comes from sex. The principles of stocks being no different from the principles of sex is nothing surprising—this has been discussed in previous lessons. If you can channel your sexual energy into stocks and develop that love-at-first-sight intuition, then you've at least begun to get your foot in the door. And the theoretical analysis covered previously must ultimately return to this kind of intuition. To put it more bluntly: for something like 419 (one-night stands), whether male or female, the decision of whether or not to do it is made within 1 second. Stocks are the same—whether to have a "419" with a stock is decided the same way. Of course, some 419s lead to lifelong regret, and some to lifelong fond memories—same as with stocks. And a true master of 419s can see through a person with a single glance and knows what they need, what they should take, what they shouldn't take, and can let go cleanly—like a wild goose crossing an empty sky. Otherwise it's not a proper 419. Stocks are the same—stock price movements are like a boy toy posing seductively, and you need to see through the act with one look. Of course, stocks are more lovable than boy toys in one respect: a boy toy's seductive poses only go in one direction, while stocks have three possible states. This also means that with boy toys, there comes a time of boredom, but with stocks, that's not necessarily the case.

But before you have that all-seeing eye, don't pretend to be a Don Juan. Just stay home obediently and hold the baby. Being a playboy requires skill. Stocks are the same—without that transcendent intuition, just analyze honestly. After roughly selecting your target on higher-level charts, pick your microscope and conduct detailed tracking analysis. Then position your buy point according to your operation level, operate according to that level, and keep at it until you've played that stock to death, until you're bored, or until you discover new and better toys to play with. From a purely theoretical standpoint, no stock has any special operational value—a stock oscillating within a hub doesn't necessarily produce less profit than one in a unilateral rise at the corresponding level.

There are only bad operators, no bad stocks. Stocks are just waste paper—fundamentally all garbage. If your technique and mentality aren't up to par, any stock can bankrupt you. Of course, for small capital, you must choose stocks with good personality (active trading character). For large capital, a stock's personality can be reshaped—just as there's no boy toy that can't be made into a boy toy, it's merely a matter of cost. Stocks are the same: any stock's trading personality can be reshaped; it's just that the energy required varies.

No more writing. Another day has already begun. This ID needs to wash up and sleep too. Signing off first. See you all after today's market close for commentary. Then, after this ID's dinner banquet, I'll catch the last flight back to Beijing. Heart racing toward home. Tuesday, I can finally watch the market from Beijing. Goodbye.