Complete Practical Guide to the Chanlun Trading System: From Trend Analysis to Precise Buying and Selling Logic

The Chanlun theory reveals the true nature of capital markets, exposing participants’ greed and fear without hiding. Built on thorough research into human weaknesses, it constructs a complete set of rules to encode and decompose market trends in a new way. Whether trading stocks or digital assets, mastering the practical logic of Chanlun can significantly improve decision quality. This article will explain how to apply the Chanlun system for precise trading from three perspectives: theoretical foundation, operational framework, and practical methods.

The Underlying Logic of Chanlun: Why Rules Can Perfectly Predict Market Movements

The essence of Chanlun lies in the core proposition that “trend always completes.” This means all market movements—whether up, down, or sideways—must go through a complete cycle; there are no forever unidirectional trends. The principle theoretically solves a fundamental problem in free economic and financial markets: all trends can be precisely located and classified.

Chanlun achieves this accuracy through three combined laws:

Level 1: Inclusion Law – Handling the inclusion relationships between adjacent K-lines, the most basic coding method. It filters out noise in trends, only retaining effective directional changes.

Level 2: Stroke Combination Law – Strokes are the basic units of the entire system. Without understanding the rules of stroke combination, Chanlun cannot be discussed. A stroke is essentially a trend unit formed by a series of inclusions.

Level 3: Trend Combination Law – The most brilliant and artistic part of Chanlun. It defines the structure of trends recursively, allowing complex market actions to be described with simple mathematical rules.

Thanks to this three-tiered rule system, traders can find certainty amid seemingly chaotic markets.

Central Trend and Level Recognition: Building the Operational Framework of Chanlun

Recognizing the Central Trend—The Battleground of Market Repetition

A central trend at a certain level is an area overlapped by at least three consecutive sub-level trends. Although this definition sounds complex, in practice it can be judged visually: a 5-minute central trend only needs to check if three 1-minute trend types overlap.

There are four forms of central trend evolution:

• Formation: Three sub-level trends first overlap
• Extension: The central trend oscillates repeatedly within the formation, extending no more than nine sub-level cycles
• Rebirth: After extending beyond nine segments, it evolves into a new central trend
• Expansion: A lower-level central trend upgrades to a higher-level central trend

The key to understanding central trends is recognizing that: a central trend is a zone of repeated tug-of-war between bulls and bears. Every time price returns to the central trend, it’s an opportunity for major players to shake out or absorb orders.

Level Division—The Fundamental Factor in Determining Trading Profits

Chanlun regards levels as axioms of geometry—unnecessary to define but omnipresent. The essence of levels reflects the combined influence of capital scale, behavioral tendencies, and systemic risk.

In practical trading, common level systems include:

• High-level frameworks: Year, quarter, month, week, daily charts (determine overall direction)
• Medium-level decisions: 60-minute, 30-minute, 15-minute charts (main operational decisions)
• Low-level precision: 5-minute, 1-minute charts (precise entry and exit points)

The principle of level matching is simple but often overlooked: When higher levels trend upward, oscillations at lower levels are opportunities to add positions or reduce costs; when higher levels trend downward, rebounds at lower levels signal to reduce positions or stop losses. Many traders lose money because they ignore the level structure—using a 30-minute buy point against a daily sell point.

The Five-Step Method to Find Accurate Entry and Exit Points: Integrating Central Trend, Divergence, and Pattern

Step 1: Determine the Trend Type

Any trend can be classified as:

• Consolidation: Oscillation within a single central trend
• Trend: Sequential alignment of two or more central trends in the same direction

The significance of this classification is: during consolidation, only rebounding and selling repeatedly; during a trend, follow the trend. Many lose money by trading frequently during consolidation—this is a mistake of trend judgment.

Step 2: Identify Central Trend Position and Boundaries

Each central trend has upper and lower boundaries. When price approaches these boundaries, it faces breakout or pullback choices. Observing the boundary on a 30-minute chart is an effective approach—this timeframe captures clear central structures without over-frequent signals.

Step 3: Use Divergence to Judge Reversal

Divergence is the only basis for changing trend judgment. Simply put, when price makes a new high or low, but momentum indicators (like MACD) weaken, it signals potential reversal.

Key points for divergence judgment:

1. Distinguish whether the trend is trending or consolidating
2. Don’t rely solely on indicator histograms; also observe the positions of the yellow and white lines
3. Compare the divergence strength of adjacent same-level trend lines and their associated strokes

Avoid the common mistake: “Price hits a new low and the green histogram shrinks, so divergence is confirmed.” This leads to a paradoxical situation of “diverging and diverging again.” True divergence should be confirmed only when multiple conditions are met simultaneously.

Step 4: Confirm Moving Average Strength

The interaction between short-term (e.g., 5-day) and long-term (e.g., 10-day) moving averages reflects market strength. When they cross and form a golden cross, it’s a safe, low-risk entry point. Conversely, a short-term moving average crossing below and breaking down signals a clear exit.

Step 5: Confirm with Multiple Indicators

When MACD, moving averages, central trend boundaries, and other indicators send buy or sell signals at the same price, this is called a “resonance point.” Such signals are highly effective and often indicate imminent significant price movements.

Progressive Operations from Pattern to Stroke: Practical Application of Multi-Level Structures

The Nature and Classification of Patterns

Patterns consist of three consecutive K-lines. Top patterns have the middle K-line with the highest high and lowest low; bottom patterns have the middle K-line with the lowest high and low.

Patterns are classified into:

• Intermediate patterns: Do not generate new strokes; are adjustments within the trend
• Standard patterns: Generate new strokes, indicating trend continuation or reversal

Determining pattern type involves observing whether, after the second buy/sell point, the lower-level trend shows consolidation divergence. Divergence suggests an intermediate pattern; no divergence indicates a standard pattern.

Pattern and Moving Average Interaction

After a bottom pattern forms, confirm that the price effectively holds support (i.e., pulls back after breaking support, with the pullback low below support but the subsequent candle closing above). If the 5-day moving average also remains above support, the probability of extending upward is high.

If, after a pattern, the price effectively breaks support, it indicates an intermediate pattern, and the market may continue downward. In this case, it’s better to exit high and avoid fighting the trend.

Multi-Level Structural Application

The most common approach uses three levels: weekly, daily, and 30-minute charts. Use weekly and daily to determine the big trend; use 30-minute and 5-minute charts for precise entries and exits.

For example: When the weekly chart is upward, and a standard bottom pattern appears on the daily chart, the risk is minimal for entry. Conversely, if the daily trend is downward and the weekly is not yet bottomed, even if the 30-minute shows buy signals, it’s better to wait, as larger downward forces dominate.

The Risk Management System of Chanlun: Level Matching and Capital Scale Correspondence

Risk Rating System

Chanlun offers a risk rating method. For example, in a downward trend:

• ------ (six dashes): Daily [−1,1], Weekly [−1,1], the worst combination; even experts avoid trading
• — (three dashes): Daily [−1,1], Weekly [−1,0], high risk
• – (two dashes): Daily [−1,0], Weekly [−1,1], medium risk
• - (one dash): Daily [−1,0], Weekly [−1,0], low risk

Similarly for upward trends. The more dashes, the higher the risk; the more plus signs, the lower the risk. This system helps traders quickly assess whether the market is suitable for trading.

Capital Scale and Level Matching

The difference between 1 million and 10,000 capital isn’t just size but the cycle of operation. With 10,000, you might freely trade on 1-minute charts; with 1 million, you need to consider at least the daily trend before entering.

Core principle: The larger the capital, the higher the level of operation needed. This is not just a theoretical suggestion but an objective market law driven by liquidity. Trying to operate large capital on small levels results in high execution costs and slippage eating into profits.

Optimizing Trading Costs

Cost is the most critical factor in trading. As long as costs are minimized, advantage can be accumulated gradually.

Practical approach: When holding a high-level long position, use small-level buy/sell points to average down or reduce costs. First buy, then add on subsequent signals, lowering the average cost and increasing profit potential. But only if the higher-level trend is intact; otherwise, adding positions will only increase losses.

The Ultimate Value of Chanlun: From Rules to Freedom

Chanlun encodes the disorderly market movements into an ordered structure, making complex markets as readable as palm lines. More importantly, it provides a complete, quantifiable, and replicable trading logic.

Trading fundamentally involves predicting market participant behavior. Greed causes hesitation at bottoms; fear prompts escape at tops. Through classification and rules, Chanlun enables traders to objectively observe markets, alleviating the interference of greed and fear in decision-making.

Once you master the core of Chanlun—understanding levels, recognizing central trends, judging divergence, and seizing buy/sell points—you gain the ability to remain profitable in any market environment. It doesn’t predict the future; it helps you see the present clearly, act decisively when certainty appears, and cut losses promptly when uncertainty arises.

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