📚 Chan Theory Teaching Volume (1) Logical Concept Outline

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Today, this article will first outline the important concepts in Chan Theory and provide simple explanations. Subsequent articles will analyze each theoretical knowledge point in Chan Theory in detail and provide practical explanations.

【Main Text】

• What is Chan Theory?

  Chan Theory is a rigorous combination of 【mathematical geometric theory + practical strategies】, consistently implementing the philosophical idea of 'the trend will ultimately be perfect'. It was published by a blogger on Sina's blog with the ID 'Chan Zhong Shuo Chan' starting June 7, 2006, in a series of 108 articles titled 'Teaching You to Trade Stocks', referred to as Chan Theory. Chan Theory is a foundational technical analysis tool for all investment and financial products related to K-lines, integrating K-line theory, chaos theory, MACD indicator analysis, and other technical analysis methods, innovatively proposing concepts like centers, divergence, and types of buy/sell points.

• Chan Theory mainly consists of 【morphology】 and 【dynamics】, with morphology as the foundation and dynamics as the support.

  I. Chan Theory Morphology

  Mainly studying the market 【price trend morphology] and 【changing patterns】, it is a 【geometric interpretation method] based on the original K-line data from the market, afterinclusion processingto identifyfractals、strokes、segments、centersand other morphological structures, based on these structures to form the current level trend. The data in the market is divided into multiple levels, and the current level trend is closely related to the subordinate level trends, forming the current level trend based on the subordinate level trends.
  Its core idea is: the change in market prices is not random; its trends have certainregularitiesandpatterns.It mainly studiesthree basic shapes:

  1. Consolidation Pattern: Market prices fluctuate within a certain range without a clear trend.

  2. Upward Trend: Composed of at least two upward consolidation patterns, showing an upward price trend, with gradually expanding price fluctuations.

  3. Downward Trend: Composed of at least two downward consolidation patterns, showing a downward price trend, with gradually expanding price fluctuations.

  The following will explain the formation process of Chan Theory's morphology trend:
  The most basic form of Chan Theory isFractal, which is formed by processing the original market K-line data throughinclusion processing, divided intoTop and Bottom Fractals.Fractals play an important role in Chan Theory morphology; the formation of strokes, segments, centers, trends, and buy/sell points in Chan Theory requires support from fractals. As shown in Figure 1, these are the top and bottom fractals.

  

  
  Two top and bottom fractals constitute a stroke,,At least three strokes are needed to form a segment,A center consists of at least 5 segments, with the start and end points of a segment also formed by fractals. Compared to strokes, segments change more stably in trends, where higher-level strokes and segments can be seen as subordinate trends. As shown in Figure 2, this is composed oftwo higher-level centers forming an upward trend.,The A and B sections indicated by the blue line are the centers,,The segments indicated by the red line are the entry and exit segments of the center,,The exit segment of the previous center can serve as the entry segment for the next center.Thetrend centeris the region offluctuation, an objective reflection of the repeated competition between buyers and sellers at key positions in the price chart.The formation of the trend center also marks the emergence of market trading points,clearly reflecting market trends.

  

  II. Chan Theory Dynamics
  In the market,Technical theory only has practical operational significance when grounded in market trading points.The purpose of Chan Theory is tofind trading points, i.e., buy/sell points,To achieve this,it is premised on accurately judging divergence,,and confirms divergence points using the range encapsulation principle,,Divergence and range encapsulation are important concepts in Chan Theory dynamics,Chan Theory dynamics is an extension of Chan Theory's technical analysis method,mainly analyzing the dynamic changes in market prices to help investors grasp market trends and directions..
  Chan Theory dividesbuy/sell points into three categories,with the second and third categories forming on the basis of the first category.According to the view in Chan Theory thattrends must be perfect,any trend will inevitably transform into another trend after it ends.For example, when a downward trend ends, it will inevitably transform into an upward or consolidation trend different from the downward trend, and at this transformation from a downward trend to an upward or consolidation trend, there exists akey moment of turning from bottom to top. If one can grasp this key moment, then it is possible to seize the most favorable buying position, which isthe first type of buying point;When an upward trend ends, it will inevitably transform into a downward or consolidation trend. When the trend undergoes a turning point, there is also akey moment of turning from top to bottom, which isthe first type of selling point.But how to grasp the critical turning points in trends? Chan Theory introduces the concept ofdivergenceto confirm the first type of buy/sell points in the trend.
  Divergence in Chan Theory dynamics refers to the emergence of divergence signals in the price trend,,which is a technical analysis method indicating a possible price reversal or trend reversal,,Based on trend centers, it comprehensively measures and compares the structure, morphology, intensity, and other information between two segments of the trend to find the key points where the trend is about to change..Divergence signals are the divergences between prices and technical indicators,,which means that when prices reach new highs or lows, the technical indicators do not follow and present contrary trends. In Chan Theory, divergence signals usually refer to the divergence between K-line trends and Chan Theory trend lines.Specifically, when market prices reach new highs or lows, if the Chan Theory trend line does not follow that trend and shows some divergence, it may indicate that the price trend is about to reverse. Similarly, when market prices do not reach new highs or lows, if the Chan Theory trend line reaches new highs or lows, it may also indicate that the price trend is about to reverse. Divergence signals in Chan Theory need to be analyzed in conjunction with other technical analysis tools and indicators to determine their effectiveness and reliability. For example, MACD indicators can be used to verify the effectiveness of divergence signals. For instance, as shown in Figure 3, it demonstrates the situation of three segments A, B, and C in a major trend, where A serves as the entry segment of segment B, and C serves as the exit segment of segment B. When the type of movement in segment C is completed, the corresponding MACD indicator area for segment A is smaller than that of segment C, constituting a standard divergence.

  

  
  When judging trend divergence, it is necessary to accurately locate thedivergence pointof the last center's exit segment at this level.By using the divergence theory in dynamics, one can accurately identify the divergence segment, but it is difficult to determine the divergence point based solely on data at this level. Therefore, Chan Theory introduces therange encapsulationmethod to solve this problem. Range encapsulation is a mathematical theorem often used to prove the existence and uniqueness of some mathematical problems; it essentially involves determining a large range first and then examining it throughsuccessive contraction.In Chan Theory dynamics, the determination of a turning point, i.e., the divergence point at a certain level, can be achieved by successively contracting the divergence segments of different levels. After confirming the divergence segment at the current level using divergence techniques, it establishes a broad range, and then searches for the corresponding divergence segments in the subordinate level trend, gradually narrowing the search range until it recurses to the lowest level. The lowest level divergence segment maps to a point in the current level trend, which is the divergence point..In summary, divergence in Chan Theory dynamics is a technical analysis method based on the divergence phenomenon between prices and technical indicators to identify price reversal trends, while range encapsulation is a technical analysis method for determining the current level divergence point through successive contraction of higher-level divergence segments down to the lowest level..

• Conclusion:

  
  I. Theoretical Characteristics of Chan Theory

  1. Analyzing K-line chart patterns through line drawing methods;

  2. Establishing trend centers through areas of dense trading and building buy/sell points based on this analysis;

  3. Examining multiple different K-line levels using the range encapsulation method;

  4. Combining morphological geometry and divergence mechanics in a dialectical analysis;

  5. The philosophical idea that 'market trends will ultimately be perfect' runs through Chan Theory.

  II. Theoretical Logic of Chan Theory

  K-line trends, in essence, are non-replicable, but the brilliance of K-line trends lies in the fact that the non-replicable trends invariably replicate isomorphic structures, and the replicability of these isomorphic structures is absolute, which is absolutely deducible. The two premises of Chan Theory are the sufficient effectiveness of prices and the non-complete absolute convergence trading in the market.

  III. Mathematical Foundation of Chan Theory

  Chan Theory is a trend-based trading technique, centered on deriving three types of buy/sell points through the morphology and dynamics of Chan Theory. Morphology is used to form geometric shapes of trends, which contain the mathematical principles of fractal theory and range encapsulation. Dynamics is used to judge whether a trend has undergone a reversal, harboring the physical philosophy of energy conservation.

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