Based on Trend Investing: Financial Market Technical Analysis Guide (趋势投资：金融市场技术分析指南) (2021)
Trend investing rests on a single empirical observation: prices in financial markets tend to move in sustained directional movements — trends — that persist far longer than random walk theory would predict. Rather than attempting to forecast fundamental value or time market turning points, the trend investor identifies the prevailing direction of price movement and aligns positions with it.
The book frames trend investing not as a predictive activity but as a reactive discipline. The trend investor does not predict where prices will go; instead, they observe where prices are already going and position themselves to profit from the continuation of that movement. This is the fundamental distinction between trend following and value investing or fundamental analysis.
Trends are not market anomalies — they are structural features arising from three persistent forces:
Information diffusion is gradual, not instantaneous. Even in the internet age, different market participants receive, process, and act on information at different speeds. Institutional investors react before retail investors. Domestic investors react before foreign investors. This staggered response creates sustained price movements as successive waves of participants act on the same information.
Behavioral biases create momentum. Anchoring causes participants to underreact to new information. Herding causes them to follow the crowd. Loss aversion causes them to hold losing positions too long and sell winners too early. The net effect is that price movements, once begun, tend to continue.
Institutional and structural flows reinforce direction. Index rebalancing, margin calls, stop-loss cascades, and portfolio insurance all create mechanical buying or selling pressure that reinforces existing trends regardless of fundamental considerations.
The trend investing framework applies across asset classes, though the book focuses primarily on:
The principles are universal, but the specific parameter calibrations (moving average periods, stop distances, volume thresholds) require adjustment for each market's microstructure, volatility profile, and trading rules.
This is not a book about predicting the future. It is not a book about finding the perfect indicator or the magic formula. It is a book about building a complete, rules-based system for identifying trends, entering positions, managing risk, and exiting — and then having the discipline to follow that system consistently. The system will be wrong frequently. The goal is not to be right on every trade but to ensure that the average win is substantially larger than the average loss.
A trend is a sustained directional movement in price characterized by a series of higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend). The book classifies trends into three tiers, drawing directly from Dow Theory:
| Trend Type | Chinese Term | Duration | Typical Price Movement |
|---|---|---|---|
| Primary trend (主趋势) | 主要趋势 | 6 months to several years | 20%–100%+ for individual stocks |
| Secondary trend (次级趋势) | 次级趋势 | 3 weeks to 3 months | 10%–33% retracement of primary |
| Minor trend (短期趋势) | 日间波动 | Days to 3 weeks | Day-to-day fluctuations |
The trend investor focuses on the primary trend for directional bias and uses secondary and minor trends for entry timing. Attempting to trade minor trends is explicitly discouraged — the noise-to-signal ratio is too high and transaction costs erode any potential edge.
The book adapts the six tenets of Dow Theory for modern application:
The market discounts everything. Price already reflects all known information, including expectations about the future. Technical analysis of price is therefore a valid method of analysis — it is not ignoring fundamentals but rather reading their aggregate effect.
Markets move in trends. This is the foundational assumption. If markets were purely random, trend following would have zero expected value. Empirical evidence across decades and markets confirms that they are not.
Trends have three phases. Every major trend passes through accumulation, public participation, and distribution (for uptrends) or their inverses (for downtrends). Recognizing which phase you are in determines your risk/reward.
Indices must confirm each other. In the Chinese context, this translates to requiring confirmation across the Shanghai Composite (上证指数), the Shenzhen Component (深证成指), and the ChiNext (创业板指). A genuine market trend should be reflected across multiple indices and sectors.
Volume must confirm the trend. Price movements on expanding volume are more significant than those on declining volume. Volume is the "fuel" that sustains trends.
Trends persist until definitive reversal signals appear. The presumption is always that the current trend will continue. The burden of proof lies with the reversal, not the continuation.
The book dedicates significant attention to the behavioral underpinnings of trends:
Anchoring bias (锚定效应). Investors anchor to recent prices. When a stock at 50 yuan rises to 60, many participants still view 50 as the "correct" price and expect a return to it. This causes systematic underreaction to genuine trend changes, allowing trends to develop gradually rather than instantaneously.
Disposition effect (处置效应). Investors tend to sell winners too early (to "lock in" gains) and hold losers too long (to "avoid" realizing losses). This creates a headwind against trends — but one that is insufficient to stop them. The net effect is that trends develop more slowly than they otherwise would, creating a longer window for trend followers to participate.
Herding (羊群效应). As a trend becomes visible, more participants join it. Media coverage increases. Analyst upgrades follow. This creates a self-reinforcing cycle of buying that pushes prices further in the trend direction.
Confirmation bias (确认偏误). Once investors take a position, they selectively seek information that confirms their view and discount information that contradicts it. This causes positions to be held longer than fundamentals might justify, extending trends.
Every trend, regardless of market or asset class, follows a recognizable lifecycle:
Phase 1: Accumulation (吸筹阶段)
Phase 2: Markup / Acceleration (上升阶段)
Phase 3: Distribution (派发阶段)
Phase 4: Markdown / Decline (下降阶段)
The practical implication: trend investors make the majority of their returns during Phase 2 and protect capital by exiting at the onset of Phase 4. Attempting to capture Phase 1 (before the trend is confirmed) or Phase 3 (as the trend is dying) carries a poor risk/reward ratio.
Moving averages are the backbone of trend identification in this framework. The book specifies the following standard periods, calibrated for the Chinese market (which has approximately 250 trading days per year):
| MA Period | Chinese Term | Function |
|---|---|---|
| 5-day | 5日均线 (周线) | Short-term momentum, entry timing |
| 10-day | 10日均线 (半月线) | Short-term trend, trailing stop for aggressive traders |
| 20-day | 20日均线 (月线) | Medium-term trend, primary trailing stop |
| 60-day | 60日均线 (季线) | Intermediate trend, key support/resistance |
| 120-day | 120日均线 (半年线) | Long-term trend boundary |
| 250-day | 250日均线 (年线) | Primary trend definition, bull/bear demarcation |
Simple Moving Average (SMA) vs. Exponential Moving Average (EMA): The book primarily uses SMA for its simplicity and universality (most Chinese market participants reference SMA), but notes that EMA provides faster response to recent price changes and may be preferred for shorter-term applications.
Golden Cross (金叉). A shorter-period MA crosses above a longer-period MA. This is a bullish signal indicating potential trend initiation or confirmation. The most significant golden crosses are:
Death Cross (死叉). The inverse — shorter MA crosses below longer MA. Each death cross at the corresponding level carries bearish significance.
MA Alignment (均线多头排列 / 空头排列). The most powerful trend signal is when all moving averages are aligned in order:
Full bullish alignment is the single strongest technical condition for trend investors. When achieved, it indicates that investors across all timeframes are in agreement, and the probability of trend continuation is at its highest.
The MACD (Moving Average Convergence Divergence) serves as the primary oscillator for confirming trend signals generated by the moving average system.
Standard parameters: MACD(12, 26, 9)
Key signals:
The book emphasizes that MACD divergences are warning signals, not action signals. A divergence alerts the trader to tighten stops and prepare for a potential reversal, but does not by itself justify exiting a trend position.
Drawing trendlines:
Trend channels:
The most fundamental definition of a trend:
When the higher-high/higher-low structure is violated — specifically when price makes a lower low in what has been an uptrend — this is the first structural warning of a potential trend change.
Before any entry, the following conditions must be met to confirm that a tradeable trend is in place:
Primary confirmation checklist:
| Condition | Requirement | Weight |
|---|---|---|
| MA alignment | At minimum, 5 > 10 > 20 > 60, all rising | Required |
| Price vs. 60-day MA | Price above 60-day MA | Required |
| MACD | MACD line above zero line | Required |
| Price structure | Higher highs and higher lows on daily chart | Required |
| Volume pattern | Rising volume on up days, declining on pullbacks | Strongly preferred |
| Weekly trend | Weekly chart also in uptrend | Strongly preferred |
Only when all required conditions are met does the stock qualify for entry consideration.
The preferred entry method. Once a trend is confirmed, wait for a pullback to a support level before entering. This improves the risk/reward ratio by entering closer to the logical stop-loss level.
Pullback entry levels (in order of preference):
Pullback quality criteria:
Entry trigger after pullback:
Used when a stock has been trading in a well-defined range and breaks out to begin a new trend leg:
Valid breakout criteria:
Breakout entry protocol:
Volume is the book's primary validation tool. No entry signal is considered complete without volume confirmation:
The book advocates a top-down approach using at minimum two timeframes:
Weekly chart (周线): Determines the primary trend direction and bias.
Daily chart (日线): Used for entry timing within the weekly trend.
Optional — 60-minute chart (60分钟线): For fine-tuning entries in volatile conditions.
The cardinal rule: never trade against the higher timeframe trend. A perfect daily buy signal in a stock with a bearish weekly trend is not a valid entry.
Every position must have a defined stop-loss before entry. The stop-loss is determined by the entry method:
| Entry Type | Initial Stop Placement | Typical Distance |
|---|---|---|
| Pullback to 20-day MA | Below the pullback low or 20-day MA | 3%–5% |
| Pullback to 60-day MA | Below the 60-day MA | 5%–8% |
| Breakout entry | Below the consolidation low | 5%–10% |
| Trendline bounce | Below the trendline | Variable |
Hard rule: If the initial risk (entry price to stop-loss) exceeds 8%, the trade should be skipped or the position size reduced to keep dollar risk within limits.
Once a position is profitable, the stop-loss is trailed upward using moving averages:
Trailing stop progression:
Key principle: Never move a trailing stop backward (further from current price). It only moves in the direction of the trend.
These are definitive exit signals regardless of profit or loss:
Any one of these signals is sufficient to trigger an exit. The trend investor does not wait for multiple confirmation — the presumption shifts to reversal upon the first valid signal.
As a backstop to technical stops:
If a position has not moved in the expected direction within a reasonable timeframe:
While the primary exit mechanism is the trailing stop, the book identifies situations where partial profit-taking is appropriate:
The book advocates ATR (Average True Range) as the basis for position sizing, ensuring that each position carries approximately equal dollar risk regardless of the stock's volatility.
Calculation:
ATR(20) = 20-day Average True Range
Risk per share = Entry price - Stop-loss price
Position size (shares) = Account risk amount / Risk per share
Account risk amount = Total account equity x Risk percentage per trade
Example:
| Parameter | Conservative | Moderate | Aggressive |
|---|---|---|---|
| Risk per trade | 0.5% of equity | 1.0% of equity | 2.0% of equity |
| Max position size | 15% of equity | 20% of equity | 25% of equity |
| Max correlated risk | 3% of equity | 5% of equity | 8% of equity |
| Max total portfolio risk | 6% of equity | 10% of equity | 15% of equity |
The book strongly recommends starting with the conservative parameters and only advancing to moderate after demonstrating consistent profitability over at least 6 months.
Maximum number of open positions: 5–8 for a typical individual investor's account. More positions dilute attention and make it difficult to monitor exits properly.
Maximum sector concentration: No more than 3 positions in the same sector. Stocks within a sector tend to be highly correlated, and sector concentration amplifies drawdown risk.
Scaling into positions:
Stocks in the same sector or thematic group tend to move together. The book requires:
Equity curve trailing stop:
| Drawdown Level | Action |
|---|---|
| 5% from equity peak | Reduce all positions by 1/3 and tighten stops |
| 10% from equity peak | Reduce to maximum 2 positions, switch to conservative sizing |
| 15% from equity peak | Close all positions, move to 100% cash, pause trading for minimum 2 weeks |
| 20% from equity peak | Conduct a full system review before resuming; consider if market regime has changed |
These drawdown rules are non-negotiable. The rationale: a 20% drawdown requires a 25% gain to recover. A 50% drawdown requires a 100% gain. Protecting capital during losing streaks is more important than maximizing gains during winning streaks.
The book applies the same trend identification tools to sector-level analysis:
Relative strength (RS) measures a sector's performance relative to the broad market index:
RS ratio = Sector index price / Broad market index price
The book maps the economic cycle to sector leadership:
| Cycle Phase | Leading Sectors | Lagging Sectors |
|---|---|---|
| Early recovery (复苏初期) | Financials, real estate, consumer discretionary | Utilities, healthcare |
| Mid expansion (扩张中期) | Technology, industrials, materials | Consumer staples |
| Late expansion (扩张后期) | Energy, materials, commodities | Technology, financials |
| Recession (衰退期) | Utilities, healthcare, consumer staples | Cyclicals, real estate |
These are guidelines, not rigid rules. The actual relative strength data takes precedence over theoretical cycle positioning.
One of the book's most important principles: cash is a valid position. When the broad market is in a downtrend (index below declining 60-day MA, bearish MA alignment), the correct action is to hold cash, not to search for stocks that are "bucking the trend."
Parameters: RSI(14) — standard 14-period relative strength index.
Usage within trend context:
Common mistake: Selling a strong trend because RSI is "overbought" at 80. In strong trends, RSI can remain above 70 for weeks or months.
Parameters: BB(20, 2) — 20-period MA with 2 standard deviation bands.
Applications:
The KDJ oscillator is widely used in Chinese markets and less common elsewhere. It is similar to the stochastic oscillator but adds a J line for additional sensitivity.
Parameters: KDJ(9, 3, 3) — standard settings.
Components:
Usage:
Limitation: KDJ is a short-term oscillator and frequently generates false signals in trending markets. It should never be used as the sole entry or exit signal — always confirm with moving average and MACD analysis.
OBV (On-Balance Volume):
VWAP (Volume-Weighted Average Price):
Volume MA:
The A-share market uses T+1 settlement — shares bought today cannot be sold until the next trading day. This has significant implications for trend followers:
A-share stocks are subject to a 10% daily price limit (20% for ChiNext/STAR Market). This creates unique dynamics:
Chinese markets are significantly influenced by government policy, regulation, and state media commentary. This creates a unique dynamic for trend followers:
The A-share market has a high proportion of retail participants, creating distinctive sentiment patterns:
The most common and most costly mistake. Buying stocks in downtrends because they "look cheap" or shorting stocks in uptrends because they "look expensive." Price determines value in trend following, not the reverse.
Selling a position that has gained 10% because "nobody went broke taking a profit." In trend following, the big winners (20%–100%+ gains) are what pay for the many small losses. Cutting winners short destroys the strategy's mathematical edge.
Hoping that a losing position will recover. Moving the stop-loss further away to "give it room." These are manifestations of the disposition effect and are fatal to trend-following returns.
Taking too many signals, trading too frequently, or using too many timeframes. The result is excessive transaction costs, decision fatigue, and poor execution.
Buying individual stock setups while the broad market is in a downtrend. In bear markets, even the strongest stocks eventually succumb.
Spending excessive time searching for the "perfect" moving average period or indicator setting. The difference between a 19-day and 21-day moving average is negligible. The system's edge comes from the discipline of following it, not from the precision of its parameters.
A stock that moves 5% up and 5% down repeatedly is volatile, not trending. Trend following requires directional persistence, not merely large moves.
After 5–8 consecutive losses (which is normal in trend following), many practitioners abandon or modify the system just before it would have captured a large winner. This is survivorship bias in reverse — you see only the losses, not the future gains the system would have produced.
Date: Early March. Account equity: 1,000,000 yuan. Risk per trade: 1%.
During weekend analysis, the stock is identified as a potential candidate:
March 15: The stock closes at 28.80, above the 28.00 resistance level. Volume is 2.3x the 20-day average. The 5-day MA has crossed above the 10 and 20-day MAs. MACD line is above zero and crossing above the signal line.
Evaluation: All entry criteria are met — breakout above resistance, volume confirmation, MA alignment beginning, MACD confirmation, sector strength, and market trend alignment.
Position sizing:
March 22: Stock pulls back to 29.20 (holding above 28.80 breakout level). Volume contracts during pullback. This is a valid throwback entry — add the remaining 1,500 shares at 29.20.
April 10: Stock reaches 33.00. Move stop-loss from 25.50 to the 20-day MA at 30.00 (trailing stop engaged).
May 5: Stock reaches 38.50 after sector news catalyst. Tighten trailing stop to the 10-day MA at 36.00.
May 18: Stock closes at 35.50, below the 10-day MA (36.20) which has turned downward. MACD histogram has been declining for 5 days.
Exit decision: Trailing stop triggered. Sell 3,000 shares at the next open.
May 19: Sell at 35.80.
Results:
"趋势是你的朋友，直到它结束。" The trend is your friend — until it ends.
"宁可错过，不可做错。" Better to miss an opportunity than to take a wrong position.
"不要和市场争辩，市场永远是对的。" Never argue with the market. The market is always right.
"止损是交易者的保险费。你不会因为今年没有出车祸就取消汽车保险。" A stop-loss is the trader's insurance premium. You would not cancel your car insurance just because you did not have an accident this year.
"真正的趋势交易者在大部分时间里都是在亏钱的——他们的利润来自少数几笔大赢的交易。" The true trend trader loses money most of the time — profits come from the few big winners.
"持仓是为了赚钱，空仓是为了不亏钱。两者同样重要。" Being invested is for making money. Being in cash is for not losing money. Both are equally important.
"不要试图预测顶部和底部。让市场告诉你趋势何时开始，何时结束。" Do not try to predict tops and bottoms. Let the market tell you when the trend begins and when it ends.
"均线多头排列是市场给你的最强信号——所有时间框架的投资者都在同一方向上达成了共识。" Bullish MA alignment is the strongest signal the market gives — investors across all timeframes have reached consensus in the same direction.
"交易系统的价值不在于它的参数有多精确，而在于你能否在连续亏损后仍然坚持执行它。" The value of a trading system lies not in how precise its parameters are, but in whether you can continue executing it after consecutive losses.
"散户亏钱的最大原因不是选错了股票，而是做反了方向——在上涨趋势中空仓，在下跌趋势中满仓。" The primary reason retail investors lose money is not stock selection but directional error — being out of the market during uptrends and fully invested during downtrends.
Implementation note: All moving average periods, risk parameters, and indicator settings described above are starting points calibrated for the Chinese A-share market. Individual practitioners should backtest these parameters against their target markets and adjust as needed. The principles — trend identification, confirmation before entry, defined risk, trailing exits — are universal. The specific numbers are not.