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Teaching You to Trade Stocks 86: Trend Analysis Must Eliminate One-Track Thinking

2007/10/24 21:53:45

Just got back. The afternoon matters were nothing much, but there was a phone call this evening that truly infuriated this ID. I must vent.

Because there's a ribbon-cutting ceremony, the organizers wanted to invite a certain highly respected elderly figure. This elder and this ID are not in the same circle. This ID sent someone to extend the invitation, and the response was: 1. Round-trip tickets for him plus his wife and secretary. (Obviously — this goes without saying, it's a given. Just tell us how many people, do you really need to spell it out?) 2. An honorarium of N yuan. (This is what infuriated this ID the most — infuriated because this N was absurdly small, completely unbefitting someone of his stature. And what shocked me was that this highly respected, universally known person would even bring this up? And the amount he named had zero gravitas — couldn't even match an N-th tier pop singer.)

This ID replied quite angrily: 1. Tickets go without saying, and we'll also arrange the presidential suite at the best local hotel — is that acceptable? 2. I don't know how to handle the honorarium, mainly because this ID can't even bring myself to mention such a figure. Giving it personally from this ID wouldn't be appropriate either, since this person still holds a high position — this ID has no desire to get entangled in bribery accusations. More importantly, such an amount — this ID couldn't even relay it to others. Saying this out loud would be losing face for him, wouldn't it? 3. If it absolutely must be this way, then this ID will simply tell the organizers he's unavailable. This would actually protect him and preserve his reputation.

Ancient Chinese people valued integrity and reputation above all. Now, what has reputation become? How tragic, my China.

I don't want to talk about this nonsense anymore. I just discovered there's a Lesson 86 that's already been written — this ID doesn't even know when it was written, or whether it's been posted before. Please help verify this. This ID has been so busy lately my head is spinning. If it's a lesson that's already been posted, please forgive me.


Teaching You to Trade Stocks 86: Trend Analysis Must Eliminate One-Track Thinking

The psychological foundation of one-track thinking is the desire to find an eternally fixed formula where, regardless of circumstances, you simply plug things in and get a ready-made answer. This kind of thinking views the world as a precise mechanism, where all operations are equivalent to a start-result model — identical starting conditions yield identical results. This is the classic one-track mindset. Some people, in studying this ID's theory, are essentially hoping to find exactly this kind of thing, yet they don't understand: when the method is perfected, the person must also be perfected. If the person isn't perfected, how can the method be?

A very simple experiment: the same group of people, the same capital, the same share count, starting a stock trading experiment simultaneously — obviously, this experiment is not reproducible. Because stock trends, at their root, are the traces of the combined psychological forces of all participants, and psychology is not reproducible. Otherwise, tell me, who can 100% replicate their own psychological curve from the four hours after market open on September 30th? These are all one-time events, non-replicable. And the reproducibility of tens of millions, even hundreds of millions of people's trades is even more impossible. Why? Every day is a new world. The factors influencing the market change every day, and these factors' psychological impact on market participants is even more blurred and chaotic. The trends produced from this obviously have zero possibility of being 100% replicated.

Therefore, from the very beginning, one must have a broad perspective. If you look at a 1-minute chart and get locked into the 1-minute level, you won't make any progress even in 100 years.

A very simple example, and the most fundamental step, is that you must dynamically grasp various concepts. For instance, the third-type sell point — in different situations, its operational significance is obviously different. Let's use this as an example and analyze it carefully:

I. During a large-level hub upward shift, a small-level third-type sell point — the only thing to watch is whether the trend extending from this sell point will alter the large-level hub upward shift itself. Here, based on the large-level trend, it's not difficult to find the boundary. Therefore, the operational significance of this third-type sell point is minimal — what matters is its warning significance. If doing short-term swing trades, it's about operating back and forth within the small-level hub oscillation, so this third-type sell point only constitutes an oscillation-based operational point.

II. During a large-level hub downward shift, a small-level third-type sell point — its significance is whether this sell point causes the large-level hub's downward shift to continue. If it continues, that means there's no operational value here whatsoever (of course, if you can short-sell, that's a different calculation). The operational significance of this type of third-type sell point is essentially zero. If we're talking about selling, the large level is already in hub downward shift — good sell points probably passed by N to the power of N times ago. In other words, the market has already given you N^N opportunities to sell. If you still haven't corrected course, then you're probably better suited to selling tofu.

III. During a large-level hub oscillation, a small-level third-type sell point — its significance depends on whether it extends into a large-level third-type sell point. If there's no such danger, it essentially doesn't constitute a major operational opportunity — it's just a short-term oscillation opportunity. Moreover, it's quite possible that after a small-level third-type sell point, a large-level buy point actually emerges — this is incredibly common in oscillations.

The situation described last in the third scenario is a technique frequently used in killing both bulls and bears. The "killing" aims to throw everyone's rhythm into chaos. How? By alternating buy points and sell points in rapid succession, constantly changing patterns, breaking every different operational model at least once. The essence of this rhythm disruption is to trigger different breakthrough and stop-loss levels — those who stop-loss and sell end up seeing the price reverse; those who buy chasing breakouts immediately get slapped.

This ID's theory has never had any boring concepts like stop-loss. What's there to stop? Three major sell points give three chances, and with different levels, opportunities are abundant. If you haven't reacted to any of them, and only think about stop-loss when you're already missing an arm and a leg — that's a disease. Go back to Mars.

And as long as you've grasped this ID's theory, the third scenario described above is perfect for executing the "Rippling Steps" maneuver. Here, we can analyze even more precisely. Based on the sequence and levels of buy and sell points that have already occurred, there are essentially the following situations:

  1. Large buy point followed by small buy point

In this situation, the subsequent small sell point often constitutes a second entry opportunity relative to the large buy point, but it's not necessarily the most precise opportunity. Because the most precise opportunity must conform to nested intervals, and not every small-level buy point necessarily falls within the nested interval corresponding to the large-level buy point. That is, this kind of small-level buy point often gets broken by small-level fluctuations, but as long as this damage doesn't destroy the large-level structure formed by the preceding large-level buy point, there will inevitably be new small-level fluctuations that bring it back above that buy point.

After a large buy point, a corresponding level structure must be generated. The subsequent small buy points are merely constructing small scaffolding within this large structure. Understand this principle, and the corresponding operations become very simple.

  1. Large sell point followed by small sell point

Just reverse the situation above.

  1. Large buy point followed by small sell point

If there's a large sell point between the two points, it can be categorized under situation 2. If not, then after this small sell point, there will be a small-level move that re-tests or confirms the large-level structure formed by the large buy point. As long as this move doesn't destroy that structure, the small buy point that forms next often carries tremendous energy. Why? Because the energy of the large structure itself serves as a crucial force. Once a structure is formed, if small-level counter-movements haven't created destruction, a natural structural extension force will cause the structure to extend — this is a significant force.

  1. Large sell point followed by small buy point

Just reverse the above.

  1. Small buy/sell points within a large hub

Inside a large hub, there are no large buy or sell points, because the appearance of a third-type sell/buy point means the hub has been destroyed. Small buy/sell points within such a large hub only create hub oscillations. Therefore, speaking generally about buy/sell points here, this type usually doesn't carry small-level operational significance. This is where bulls and bears most easily get confused.

However, among these, one type of buy/sell point often carries large-level operational significance — the sub-level buy/sell points within large-level hub oscillations. For example, a 1-minute level buy/sell point within a 5-minute oscillation carries 5-minute level operational significance. Because after that buy/sell point, there are only two possibilities: 1. The 5-minute hub oscillation continues; 2. The sub-level move following this sub-level buy/sell point happens to constitute a departure from the original hub, and then a pullback creates a third-type buy/sell point. In this case, the original buy/sell point somewhat resembles a quasi-first-type buy/sell point, and the third-type buy/sell point somewhat resembles a quasi-second-type buy/sell point for the new trend. (Note: this is just an analogy — it doesn't mean these actually are large-level first and second-type buy/sell points.)

Note, some buy/sell points carry little significance. For example, in a 1-minute downtrend, after the second hub, the third-type sell point relative to that hub has no operational significance. Why? Where did the first hub's third-type sell point go? A trend is essentially the continuation of hub movement. The first hub's third-type buy/sell point is essentially the last suitable operational opportunity. If you still need to act on later ones, it proves your reactions have serious problems. After the second hub, you should instead be watching whether the trend is about to end. For example, in the 1-minute downtrend example above, after two hubs of decline, you should be watching for bottom divergence — at that point, you're thinking about buy points, not sell points.

Furthermore, one must note: for trend reversals, such as the 1-minute downtrend example above, after the final divergence reversal, the sell point of the first upward line segment may very likely coincide with the third-type sell point of the last 1-minute hub. At that point, this sell point has virtually no operational significance — instead, you should be considering the second-type buy point on the pullback. Many bottom-fishers often get shaken out after the first surge upward, then chase higher to buy back in, precisely because they haven't figured out this relationship.

If you're fishing for a 1-minute level bottom, the worst case after that is a 1-minute consolidation. If that consolidation hasn't even completed its basic "all trends must finish" pattern — meaning not even three basic line segments have formed — and you're already running, no wonder you get shaken out.

Of course, there's a more conservative method for those who lack confidence in judging large-level divergence: just always enter at the second-type buy point. In actual operations, you can completely ignore the divergence question during the formation of the second-type buy point. After the first-type buy point, as long as the sub-level decline after the sub-level rise doesn't break the first-type buy point's position, enter. Then, if the subsequent trend at the next sub-level doesn't break the high of the first sub-level rise, sell decisively. If it does break above, hold on and wait to see if a third-type buy point appears — if it does, continue holding; if not, sell.

Following the procedure above, you can even ignore the concept of divergence entirely. So, distinguishing trend types clearly is actually enough for perfect operations. Other concepts are just icing on the cake.