Based on Chen Jiangting (陈江挺), 炒股的智慧 (Stock Trading Wisdom), 4th Edition
Chen Jiangting's Stock Trading Wisdom is one of the most widely read Chinese-language trading books, having gone through four editions since its original publication. The author, a Chinese investor who traded in both US and Chinese markets, distills his experience into a practical philosophy that bridges Western technical analysis with Eastern philosophical patience.
The core thesis can be summarized in one sentence: Trading is simple but not easy — the difficulty lies not in knowing what to do, but in doing it consistently.
The book's framework rests on four pillars:
Pillar 1: TECHNICAL ANALYSIS — Read the market's language through price and volume
Pillar 2: RISK MANAGEMENT — Never let a single trade threaten your survival
Pillar 3: PSYCHOLOGY — Master your emotions before attempting to master the market
Pillar 4: EXPERIENCE — Wisdom comes only from doing, failing, and reflecting
Chen Jiangting presents a clear hierarchy of what matters most in trading:
Level 1 (Foundation): Risk Management — survival comes first
Level 2 (Structure): Psychology — emotional control enables consistency
Level 3 (Method): Technical Analysis — the tools for reading market behavior
Level 4 (Edge): Experience — pattern recognition developed over thousands of trades
Most traders invert this hierarchy, spending 90% of their time on technical analysis and 10% on everything else. The author argues the allocation should be reversed.
The book is written for individual traders who operate primarily through technical analysis. While the author's experience spans both US and Chinese markets, the principles are presented as universal. The 4th edition includes updated examples and reflections on how markets have evolved while human psychology has remained constant.
Chen Jiangting strips technical analysis to its core components:
PRICE: The only objective fact. Everything else is interpretation.
VOLUME: The fuel behind price movement. Validates or questions price action.
TREND: The aggregate direction established by sequential price movements.
The author explicitly rejects indicator overload. Too many indicators create contradictory signals and analysis paralysis. He advocates mastering a small set of tools deeply rather than superficially learning dozens.
Support: A price level where buying pressure historically overwhelms selling pressure.
Resistance: A price level where selling pressure historically overwhelms buying pressure.
Identification Methods:
1. Previous swing highs/lows — the most reliable reference points
2. Round numbers (¥10, ¥50, ¥100) — psychological anchors
3. Moving averages — dynamic support/resistance levels
4. Volume clusters — price levels where heavy trading occurred
Key Principle: Support becomes resistance once broken (and vice versa).
This is one of the most reliable patterns in all of technical analysis.
The author advocates a simple moving average system:
Short-term: 20-day MA — captures the immediate trend
Medium-term: 60-day MA — captures the intermediate trend (the "lifeline")
Long-term: 200-day MA — separates bull markets from bear markets
Interpretation:
- Price above 200-day MA = bullish environment, favor long positions
- Price below 200-day MA = bearish environment, favor cash or avoid
- 20-day MA crossing above 60-day MA = intermediate uptrend beginning
- 20-day MA crossing below 60-day MA = intermediate uptrend ending
- Price touching and bouncing off 60-day MA in uptrend = buying opportunity
Volume Pattern | Meaning
-------------------------------|------------------------------------------
Price up + volume up | Healthy trend, buyers in control
Price up + volume declining | Trend weakening, potential reversal ahead
Price down + volume surge | Panic selling, potential capitulation
Price down + volume declining | Orderly correction, likely to find support
Breakout on 2x+ average volume| High-probability valid breakout
Breakout on normal/low volume | Suspect breakout, likely to fail
HIGH-RELIABILITY PATTERNS:
1. Double bottom (W bottom) — confirmed when neckline breaks with volume
2. Head and shoulders top — confirmed when neckline breaks
3. Consolidation breakout — flat trading range broken on volume expansion
4. Higher lows sequence — ascending triangle or ascending channel
LOW-RELIABILITY (AVOID):
1. Patterns on very low timeframes (intraday)
2. Patterns without volume confirmation
3. Patterns in thinly traded stocks
4. Fourth or fifth retest of same support/resistance
UPTREND: Sequence of higher highs and higher lows
DOWNTREND: Sequence of lower highs and lower lows
SIDEWAYS: No clear sequence — price oscillates in a range
Trading implications:
- In an uptrend: BUY dips, hold through minor pullbacks
- In a downtrend: STAND ASIDE (or short if experienced)
- In a sideways range: TRADE the range boundaries or stand aside
Chen Jiangting's central trading methodology is trend following:
PRINCIPLE: "Don't predict, follow."
You do not need to predict where the market will go. You only need to:
1. Identify when a trend has started (via price/volume/MA confirmation)
2. Enter in the direction of the trend
3. Stay with the trend until it shows signs of ending
4. Exit when the trend is confirmed as reversed
The edge comes not from being right about direction more often, but from:
- Cutting losses short when wrong (small losses)
- Letting profits run when right (large gains)
- Maintaining a positive expectancy over many trades
Uptrend → Potential Reversal Signals:
1. Stock makes a new high but volume is significantly less than previous high
2. 20-day MA flattens and begins to curve downward
3. Price breaks below the most recent significant swing low
4. A rally attempt fails to make a new high (lower high forms)
Downtrend → Potential Reversal Signals:
1. Stock makes a new low on diminishing volume (selling exhaustion)
2. Price forms a higher low after a significant decline
3. 20-day MA flattens and begins to curve upward
4. A breakout above the most recent significant swing high
This is the core of the book and what distinguishes it from pure technical analysis texts.
FEAR manifests as:
- Selling winners too early (afraid of giving back profits)
- Not entering valid setups (afraid of losing money)
- Freezing when stop-loss should be executed (afraid to realize loss)
- Avoiding the market entirely after a losing streak
GREED manifests as:
- Holding losers hoping for recovery (greed for breakeven)
- Adding to losing positions (greed to lower average cost)
- Oversizing positions (greed for outsized returns)
- Ignoring exit signals in winning trades (greed for more)
KNOWLEDGE × DISCIPLINE = RESULTS
Most traders have sufficient knowledge but insufficient discipline.
A mediocre system followed with iron discipline will outperform
a brilliant system followed with poor discipline.
Entry: Excitement (finally in a position) + Anxiety (what if I'm wrong?)
Early gain: Euphoria (I knew it!) → leads to moving stops or adding size
Early loss: Denial (it will come back) → leads to ignoring stop-loss
Stop hit: Pain, anger, self-doubt → leads to revenge trading
Big win: Overconfidence → leads to oversized next trade
Big loss: Despair → leads to abandoning the system entirely
The solution: MECHANICAL EXECUTION of pre-defined rules.
Decide BEFORE the trade what you will do at each stage.
Write it down. Execute exactly as written. No improvisation.
"Most of the time, the correct action is to do nothing."
Patience required at multiple stages:
1. Patience to wait for a valid setup (not forcing trades)
2. Patience to let a winning trade develop (not taking profits too early)
3. Patience to sit in cash during unfavorable markets
4. Patience to let your system work over many trades (not abandoning it)
The market punishes impatience and rewards patience.
This is the single most underrated edge in trading.
RULE #1: Never risk more than you can afford to lose.
RULE #2: Never risk enough on a single trade to threaten your ability to trade tomorrow.
RULE #3: Accept that losses are a cost of doing business — not a failure.
The math of recovery:
- Lose 10% → need 11% to recover (manageable)
- Lose 25% → need 33% to recover (difficult)
- Lose 50% → need 100% to recover (very difficult)
- Lose 75% → need 300% to recover (nearly impossible)
This asymmetry is why position sizing and stop-losses are more important than entry signals.
Maximum risk per trade: 2% of total trading capital
Example:
Total capital: ¥100,000
Maximum risk per trade: ¥2,000
If entry price is ¥50 and stop-loss is ¥46 (¥4 risk per share):
Maximum position size = ¥2,000 / ¥4 = 500 shares
Position value = 500 × ¥50 = ¥25,000 (25% of capital)
Note: The stop distance determines position size, NOT the other way around.
Wide stop → smaller position. Tight stop → larger position (but higher chance of stop-out).
Portfolio-level circuit breakers:
- If portfolio is down 6% in a month: Reduce position sizes by 50%
- If portfolio is down 10% in a month: Stop trading for 1 week minimum
- If portfolio is down 20% from peak: Stop trading, review entire system
□ TREND: Price is above 60-day MA (for long trades)
□ DIRECTION: 20-day MA is sloping upward
□ SETUP: One of the following patterns is present:
a) Pullback to 20-day or 60-day MA with support holding
b) Breakout from consolidation range on 2x+ volume
c) Higher low forming after a correction in established uptrend
□ VOLUME: Volume confirms the setup (expanding on breakout, contracting on pullback)
□ RISK: Stop-loss level identified BEFORE entry
□ SIZE: Position sized so maximum loss is ≤ 2% of capital
□ CONTEXT: No major earnings report or macro event within 3 days
Preferred entry methods:
1. BREAKOUT ENTRY: Buy as price breaks above resistance on strong volume
- Pros: Momentum confirms direction
- Cons: Higher entry price, larger stop distance
2. PULLBACK ENTRY: Buy as price pulls back to support/MA in an uptrend
- Pros: Better price, tighter stop, better risk/reward
- Cons: May be catching a falling knife if trend has reversed
3. SECOND CHANCE ENTRY: After a breakout, wait for the pullback to retest the breakout level
- Pros: Confirms breakout was valid, tight stop possible
- Cons: Not all breakouts pull back — may miss the trade entirely
- The market is in a clear downtrend (200-day MA sloping down)
- The stock has already moved 20%+ from the breakout point
- Volume is declining on the move up
- You cannot identify a clear stop-loss level
- You already have the maximum number of open positions
- You are emotional (angry, euphoric, desperate, or impulsive)
Type | Method | When to Use
------------------|--------------------------------------|---------------------------
Initial stop | Below recent swing low or support | Every new position
Breakeven stop | Move stop to entry price | After stock moves 1R in favor
Trailing stop | Below most recent swing low | In established winning trade
Time stop | Exit if no progress in 2-3 weeks | When trade is going nowhere
Emergency stop | Exit immediately on abnormal event | Earnings shock, scandal, etc.
"Cut your losses and let your profits run."
This is the single most repeated and most violated principle in trading.
Implementation:
- When wrong: Exit quickly at predetermined stop. Accept the small loss.
- When right: Do NOT exit just because you have a profit. Move stop up
and let the trend carry you.
The ratio of average win to average loss must be > 2:1.
If your win rate is 40%, you need average wins to be 3x average losses to be profitable.
If your win rate is 50%, you need average wins to be 2x average losses.
Option A: Trailing Stop Exit
- Set trailing stop below each successive swing low
- Exit only when trailing stop is hit
- Pros: Captures full trend moves
- Cons: Gives back some profit at the end
Option B: Target + Trail Hybrid
- Take 50% off at 2:1 reward/risk
- Trail remaining with stop below swing lows
- Pros: Locks in some profit, lets remainder run
- Cons: May leave money on the table
The author prefers Option A for trending markets and Option B for range-bound markets.
Method: Add to winning positions only, never to losers.
Scale-in protocol:
- Initial position: 50% of planned total size
- Add 1: When trade moves 1R in your favor and sets up again (add 30%)
- Add 2: When trade moves 2R in your favor and sets up again (add 20%)
Rules:
- Each add must have its own stop-loss
- Total position risk must still not exceed 2% of capital
- Never add more than twice to any single position
Total portfolio risk (sum of all open position risks) should not exceed:
- Conservative: 6% of total capital
- Moderate: 10% of total capital
- Aggressive: 15% of total capital (experienced traders only)
Example (Moderate):
Total capital: ¥500,000
Max portfolio risk: ¥50,000
With 2% risk per trade, maximum 5 positions open simultaneously
GO TO CASH (100%) when:
- The broad market is below its 200-day MA and declining
- You have hit your monthly drawdown limit
- You cannot find any setups that meet your entry criteria
- You are going through personal stress that affects decision-making
Cash is a position. Being out of the market IS a trade decision.
Most traders drastically underestimate the value of simply not trading.
Before market open each day:
1. Review overnight news that may affect holdings (5 minutes)
2. Check stop-loss levels for all open positions (2 minutes)
3. Review watchlist for any stocks approaching entry zones (5 minutes)
4. Set alerts for key price levels (2 minutes)
5. Write down today's plan: "If X happens, I will do Y" (5 minutes)
Total: ~20 minutes
During market hours:
- Execute pre-planned actions ONLY
- No new analysis during market hours
- No impulse trades
After market close (weekly):
1. Record all trades taken: entry, exit, P&L, reason
2. Grade each trade: Was the process followed? (A/B/C/F)
3. Separate PROCESS quality from OUTCOME quality:
- Good process + good outcome = well done
- Good process + bad outcome = acceptable (part of the game)
- Bad process + good outcome = DANGEROUS (reinforces bad habits)
- Bad process + bad outcome = expected (fix the process)
4. Identify patterns in your mistakes
5. Adjust rules if evidence warrants (but resist constant tinkering)
Required fields for each trade:
- Date and time of entry/exit
- Stock name and code
- Entry price, exit price, position size
- Stop-loss level and whether it was honored
- Setup type (breakout, pullback, etc.)
- Reason for entry (specific criteria met)
- Reason for exit (stop hit, target reached, signal reversed)
- P&L in both money and R-multiples
- Emotional state at entry and exit
- Process grade (did you follow your rules?)
- Screenshot of chart at entry and exit
- Lessons learned
Error #1: NO STOP-LOSS
"I'll just watch it and exit if it gets bad."
Reality: You won't. By the time "bad" arrives, you'll be hoping for recovery.
Solution: Stop-loss must be set BEFORE entry and NEVER moved further away.
Error #2: AVERAGING DOWN
"The stock I liked at ¥50 is even cheaper at ¥40!"
Reality: You are adding risk to a losing position. If your analysis was wrong
at ¥50, buying more at ¥40 just increases your exposure to that wrong analysis.
Solution: Only add to winning positions. Cut losing positions.
Error #3: OVERTRADING
"I need to trade every day to make money."
Reality: Transaction costs and bad entries from forcing trades destroy returns.
The best traders spend most of their time waiting, not trading.
Solution: Track your trade frequency. If you are trading daily, you are overtrading.
Error #4: SYSTEM HOPPING
"My system lost 3 times in a row, so I need a new system."
Reality: Even the best system will have losing streaks. Three losses in a row
is statistically normal for any system with a 50% win rate.
Solution: Commit to one system for at least 100 trades before evaluating.
Error #5: IGNORING POSITION SIZE
"I'll just buy 1000 shares."
Reality: Position size should be determined by risk (stop distance), not
by a round number of shares or a fixed dollar amount.
Solution: Always calculate position size from the 2% risk rule.
RECENCY BIAS: Last trade's outcome dominates your next decision
Fix: Look at your last 20 trades, not your last 1 trade
CONFIRMATION BIAS: Seeking information that confirms your existing position
Fix: Actively seek the bear case for every long position
SUNK COST FALLACY: "I've already lost so much, I can't sell now"
Fix: Ask "Would I buy this stock today at this price?" If no, sell.
ANCHORING: "It was ¥80 before, so ¥50 is cheap"
Fix: Past prices are irrelevant. Only current value and trend matter.
OUTCOME BIAS: Judging decisions by results rather than process
Fix: Grade process separately from outcome in your journal
SETUP IDENTIFICATION
Date: March 15
Stock: XYZ Technology (虚拟科技), currently ¥32
Observation: Stock has been in uptrend (above rising 60-day MA) for 3 months.
Currently pulling back from ¥36 high toward the 20-day MA at ¥31.50.
Volume declining on pullback (healthy — no panic selling).
ENTRY PLANNING
Entry zone: ¥31.50 - ¥32.00 (near 20-day MA support)
Stop-loss: ¥29.80 (below recent swing low of ¥30.20)
Risk per share: ¥32.00 - ¥29.80 = ¥2.20
Total capital: ¥200,000
Max risk (2%): ¥4,000
Position size: ¥4,000 / ¥2.20 = 1,818 shares → round to 1,800 shares
Position value: 1,800 × ¥32 = ¥57,600 (28.8% of capital)
ENTRY EXECUTION (March 16)
Buy 1,800 shares of XYZ at ¥32.00
Stop-loss order set at ¥29.80
Plan: First target at ¥36.40 (2R), move stop to breakeven
Journal entry: "Pullback buy in uptrend. 20MA support holding. Volume drying up on
pullback. Risk ¥2.20/share, 2R target ¥36.40."
TRADE MANAGEMENT
March 18: Stock dips to ¥31.20, bounces. Stop not triggered. Hold per plan.
March 25: Stock rallies to ¥34.50. 1R achieved. No action yet.
April 3: Stock reaches ¥36.50 (2R achieved).
Action: Sell 900 shares (50%) at ¥36.50. Move stop on remainder to ¥32.00 (breakeven).
Locked in: 900 × (¥36.50 - ¥32.00) = ¥4,050 profit
April 10: Stock continues to ¥39.00. Move trailing stop to below swing low at ¥36.00.
April 20: Stock reaches ¥42.00. Move trailing stop to ¥38.50.
April 28: Stock reverses, hits ¥38.50 trailing stop.
Action: Sell remaining 900 shares at ¥38.50.
Remaining profit: 900 × (¥38.50 - ¥32.00) = ¥5,850
FINAL ACCOUNTING
Total profit: ¥4,050 + ¥5,850 = ¥9,900
Risk taken: ¥4,000 (2% of capital)
R-multiple: ¥9,900 / ¥4,000 = 2.48R
Duration: ~6 weeks
Process grade: A (followed all rules, no improvisation)
"Trading is a process of slowly getting rich. Those who try to get rich quickly in the
market will get poor quickly instead."
"The stop-loss is the trader's only true friend. Everything else — indicators, patterns,
tips, analysis — can betray you. The stop-loss never will, if you honor it."
"Cut losses short, let profits run. You will hear this a thousand times. You will
understand it intellectually immediately. You will need years of painful experience before
you can actually do it."
"The market does not owe you money. It does not know you exist. It does not care about your
mortgage, your financial goals, or your ego. Treat it with the respect you would give a
powerful, indifferent force of nature."
"Patience is the most profitable trading strategy. The best traders I know spend 80% of
their time waiting and 20% of their time acting. Amateurs reverse this ratio."
"A losing trade is not a mistake if you followed your rules. A winning trade IS a mistake
if you broke your rules to get it. Process over outcome, always."
"Do not add to a losing position. This is not 'buying the dip' — this is compounding an
error. The market is telling you that you are wrong. Listen."
"Your biggest losses will come not from being wrong, but from being wrong and then being
stubborn about it. The first loss is the cheapest loss."
"Every trader must pay tuition to the market. The question is not whether you will pay,
but whether you will learn from what you paid."
"The market is a mirror. It reflects your character, your discipline, your patience, and
your weaknesses. You cannot cheat the mirror."
"Simplicity is the ultimate sophistication in trading. The trader with three indicators and
iron discipline will outperform the trader with thirty indicators and no discipline."
"Cash is a position. Sometimes the best trade is no trade at all."
Implementation specification compiled from Chen Jiangting (陈江挺), 炒股的智慧 (4th Edition). This document is a systematic distillation for practical application and does not replace reading the original work.