Introduction

ChanLun is a technical analysis theory introduced by Chinese stock market analyst Chan Zhong Shuò Chán. The core idea behind ChanLun is based on the regularity of market price fluctuations, utilizing concepts such as “Center,” “Stroke,” and “Segment” to assess market trends and identify buy and sell points. ChanLun posits that price movements have specific shapes and structures, and that market fluctuations are not random but can be predicted using particular technical methods.

The Mystery of the Author

The author’s identity of ChanLun has been the subject of much controversy. Initially, the author used the ID “A Girl Who Loves Math” (爱数学的女孩) and frequently hinted at being female in the articles, with a bold writing style that incorporated playful and self-deprecating elements. Later, the author changed their online name to Chán Zhōng Shuō Chán (缠中说禅). However, many speculations about the author’s true identity, especially their gender, have arisen.

Some people have speculated that the author of Chán Lun is Li Biao (李彪), a trader from Yi’an Technology (亿安科技). This theory is based on the similarity between certain trading methods of Li Biao and the market patterns described in Chán Lun. Additionally, some of his diaries mentioned similar technical analysis techniques. While this speculation has not been confirmed, it has sparked widespread discussion.

Despite the significant appreciation for the theoretical contributions of ChanLun, the author’s identity and certain practices remain a focal point of interest and debate. The author’s early self-questioning, exaggerated self-promotion, and other behaviors have led to many speculations about their motivations and underlying intentions. To this day, the author’s true identity remains unverified, and the ongoing controversy about their identity and motives has, in some ways, added a sense of mystery to the theory itself.

Basic Definitions

Top Fractal and Bottom Fractal

A top fractal consists of three candlesticks; the second candlestick is the highest of the three, and the first and third candlesticks have lower highs. In contrast, a bottom fractal has the second candlestick as the lowest of the three, with the first and third candlesticks having higher lows.

BTC Bottom Fractal Example

BTC Top Fractal Example

Stroke

In ChanLun, a stroke represents a market movement segment defined by a connection between a top and a bottom fractal.

Stroke Rules:

1. It must be formed by a top fractal and a bottom fractal.
2. The two fractals must not share any candlesticks.
3. The highest point of the top fractal must be higher than the lowest point of the bottom fractal.

Example

Segment

A segment is a larger market wave unit composed of multiple strokes, used to describe a higher-level price movement structure. The definition of a segment is more complex than a stroke, requiring at least three strokes. Additionally, the first three strokes must overlap in certain ways to form a clearer trend fluctuation. The segment helps identify longer-term market trends by combining several strokes into one unified structure.

Center, Trend, and Consolidation

A center is formed when at least three smaller-level price movements overlap in a specific price range. In simple terms, it is the region where multiple trends at different levels converge, creating a price equilibrium zone. Prices within this zone oscillate without significant breakout or continuation.

Consolidation refers to a process where the price repeatedly oscillates and consolidates within a center. During this phase, only one center exists. The market is in a state of indecision, and prices move sideways within the defined range.

A trend is formed when at least two consecutive centers are moving in the same direction. These centers must align in the same direction, indicating a sustained directional move. Only when multiple centers are aligned in the same direction can they be considered a trend.

Example of Trend Formed by Two Centers:

Example

The Evolution of Center

1. Center Extension

After a center forms, if the price continues to oscillate within the bounds of the center (i.e., the market does not break the center’s boundaries but remains in the range), this is known as center extension. It indicates the market is still in a consolidation phase without a clear trend direction. In this scenario, the price fluctuates within the range, and the market remains undecided on its next move.

1. Center Rebirth

Center rebirth refers to a situation where the existing center is broken, and a new center forms. Typically, this new center appears either above or below the original one, signaling that the price has exited the previous consolidation zone and is now moving into a new range for further consolidation or a new trend.

1. Center Expansion

Center expansion occurs when the price breaks through an existing center, only to return to the original range, forming a larger center. This suggests that the market is testing the boundaries of the previous consolidation zone and may develop into a higher-level consolidation or trend.

Divergence

In ChanLun, divergence is similar to the traditional concept of “back divergence” and refers to weakening trend strength within an uptrend or downtrend. When a trend’s momentum is weaker than the previous move, it indicates trend exhaustion, which can signal a potential reversal or consolidation.

ChanLun uses the MACD indicator to determine when divergence occurs. If the price makes a new high or low, but the MACD does not confirm with a new high or low, this indicates divergence. Traders can use this to assess whether the trend’s momentum is weakening, which may lead to a reversal or consolidation phase.

According to ChanLun, no matter the time frame (such as 1-minute, 1-hour, or daily charts), once divergence appears, it is certain that a buy or sell signal will form at that level. This makes divergence a crucial tool for identifying key turning points in the market.

Key Theories in ChanLun

Fundamental Principles

1. The Trend Will Always Complete Perfectly
   ChanLun theory asserts that market movements are either trends or consolidations. A trend will inevitably transform into a consolidation, which will inevitably evolve into a trend. In other words, the market cannot remain in a single state forever; it will ultimately complete a cycle, transitioning into another state. Whether it is an uptrend or downtrend, both will eventually undergo a consolidation phase. Similarly, consolidation will always result in a trend formation afterward.
   This concept suggests that market movements are cyclical, and every market cycle will transition between trends and consolidations. Hence, all movements will undergo a “perfect” progression, forming a complete cycle of market action.

2. Any Completed Movement Must Contain a Center
   According to ChanLun, the Center is the mark of a completed market movement, serving as a transitional phase between trends and consolidations. It helps in understanding the underlying structure and rhythm of the market. Whether it is an uptrend or a consolidation, every completed movement must contain a Center.
   A complete uptrend must include at least one Center, while a consolidation phase will consist of a single Center. This Center serves as a signal for trend transformation: after consolidation, the market may enter a trending phase, and after a trend completes, the market may revert to consolidation.

Decomposition Theorem

1. Any Movement Can Be Decomposed into Equal-Level Rises, Falls, and Consolidations
   Every market movement can be broken down into three basic forms: rises, falls, and consolidations. Whether the movement is an uptrend, downtrend, or consolidation, all are integral to the overall trend. Each movement can be dissected into smaller sub-level movements. This decomposition is essential to understanding the layered structure of price action.

2. Any Level of Movement Must Contain at Least Three Sub-Level Movements
   ChanLun holds that any large movement (whether an uptrend or downtrend) will contain at least three sub-level movements, which must include at least one Center. According to this theory, every trend comprises several sub-level movements, with each of these smaller movements containing a Center, forming the complete structure of the larger trend.

Buy Signals in ChanLun Theory

1. First Buy Signal
   The first buy signal is a reversal bottoming buy signal. It occurs when, within the current downtrend at this level, the price breaks below the last Center on a lower time frame, forming a divergence buy signal. Importantly, it must be after the last Center of the current downtrend, marking the potential exhaustion of the downward momentum.

2. Second Buy Signal
   The second buy signal forms after the first buy signal, typically when the market has undergone a preliminary reversal and started moving upward. A pullback follows this initial rise, but the low point of the pullback will not fall below the level of the first buy signal. This buy signal indicates that the market has found support and is likely to continue upward.

3. Third Buy Signal
   The third buy signal appears after the second buy signal, typically within an ongoing uptrend. This signal occurs when a Center is formed, and after the price breaks through the Center, it experiences a pullback. If this pullback does not return to the previous Center region, it forms the third buy signal. This indicates a continuation of the trend, confirming that the upward momentum remains strong.

Differences Between the Three Types of Buy Signals

Case Study

The chart below shows an example from Bitcoin on January 30, 2024. In this chart, the price initially experienced a decline (indicated by the arrows). At this point, the downward momentum gradually weakened, as evidenced by the shrinking red bars in the MACD indicator. However, despite the price reaching a new low, this suggests trend exhaustion, which fits the characteristics of a divergence. Shortly after, the price began to reverse, marking the first type of buy signal. After the first buy signal, the price rose until a pullback occurred within the blue box region, forming a Center. The pullback’s low did not breach the low of the first buy signal, but instead, it remained near the Center region. Subsequently, the price resumed its upward movement. While the magnitude of this pullback was relatively small, it confirmed the effectiveness of the Center, leading to the formation of a second buy signal.

The third buy signal appeared during the subsequent uptrend. After the price broke above the Center region, a small pullback occurred. This pullback did not return to the previous Center, but instead, it held a higher position, forming the third buy signal. When the third buy signal emerged, the confirmation of the divergence potentially signaled the continuation of the trend. The MACD indicator showed increasing momentum, suggesting that the market’s strong upward momentum had not yet been exhausted.

Conclusion

ChanLun is a technical analysis method based on market trend structure, emphasizing identifying price turning points and trend directions through geometric principles and the hierarchical relationships of market fluctuations. Its core concepts include “Fractal,” “Center,” “Stroke,” and “Segment,” which help analyze both short-term price movements and long-term trends. What sets ChanLun apart is its ability to define different levels of market movements and centers, revealing potential trends and reversal signals, making it a practical tool for traders.

However, the complexity of ChanLun also presents challenges in its application, particularly when it comes to identifying signals such as divergences and buy points, which can lead to differences in interpretation. While ChanLun offers a robust framework for market analysis, its reliance on subjective judgment and extensive market experience means that beginners may struggle to apply it accurately. Overall, ChanLun provides a fresh perspective on trend analysis, but in practice, it should be used with other analytical tools to guide trading decisions better.