In the world of trading, we are always seeking definitive answers. The most perplexing question is whether the current market movement is a continuation pattern or a trend reversal. The answer to this directly determines whether we should hold our existing position or decisively reverse our trade. However, truly mature traders understand that this question itself needs to be redefined.
From the essence of technical analysis, any judgment is based on probability. Technical analysis is not a crystal ball predicting the future, but rather a toolbox for classifying market behavior. Just as meteorologists use indicators like atmospheric pressure, humidity, and wind speed to forecast weather changes, traders use price, volume, and momentum to assess market conditions. The commonality between these two professions lies in their handling of probability, not certainty.
This cognitive shift is crucial. When we let go of the obsession with 'precise predictions,' we can truly begin to understand the essence of the market. The market is not a precision clock but a complex ecosystem where every participant makes decisions based on limited information. The collective manifestation of these decisions forms the price fluctuations we observe. Understanding this is the first step in building our trading philosophy.
If there is any concept in the trading field that is the most important yet easily overlooked, it must be 'levels.'
Just like navigating on a map, if we do not first determine the scale of observation, all discussions about direction will lose meaning. Are we looking at a city map or a world map? Are we planning a walking route or a flight path? At different scales, the same geographical phenomenon may present completely different meanings.
In trading, the concept of levels is similarly important. Any discussion of 'trend,' 'reversal,' or 'continuation' that departs from levels is unfounded. When we say 'trend,' we must clarify which level's trend we are referring to; when we talk about 'reversal,' we must be clear about from which level to which level the reversal occurs. This awareness of levels is one of the most significant differences between professional traders and amateurs.
The establishment of levels is not arbitrary. A stable and effective trading system must be built on clear level definitions. This definition
It should include three dimensions: observation level, operation level, and filtering level.
The observation level is used to grasp the overall direction, the operation level is used to find specific entry points, and the filtering level is used to exclude market noise. The coordination of these three levels forms the basic framework for trading decisions.
After understanding the concept of levels, we can delve deeper into the internal mechanisms of market consolidations and reversals.
The law of inertia of trends
At a specific level, a newly made high, especially when confirmed in a strong manner, often possesses the intrinsic momentum to continue innovating. This phenomenon can be understood using the physical law of inertia: once a trend is formed, it tends to continue, but this manifestation of inertia is conditional—it only holds at specific levels.
When we see a strong trend movement at a certain level, we are actually witnessing a significant imbalance between the bullish and bearish forces at that level. This imbalance does not change easily, just as a giant ship moving at full speed does not suddenly turn around. The key is that we must accurately identify the level to which this trend is attached, rather than being confused by fluctuations at smaller levels.
The essence of the consolidation state is a necessary rest during the progression of a larger level trend. From the perspective of levels, consolidations typically occur at the secondary level while the primary level trend remains intact.
The core standard for judging the consolidation state is whether the trend structure at the current level has been damaged. If not, then all consolidations can be viewed as continuations. Specifically, it concerns whether some important supports have been broken or whether the market has constructed new consolidations to make breakthroughs and drive new trend formations.
The reversal of a trend is never an instantaneous process but a complex process involving the interaction of multiple levels. A true trend reversal requires meeting three conditions: first, the current trend level shows structural breakdown; second, a confirmation signal appears at a larger level; finally, the new trend direction receives confirmation of strength and breakthrough.
This process is like the change of seasons: summer does not suddenly turn into winter but goes through the transition of autumn. In the market, the transformation of a higher-level trend also requires a similar process. We often see that the end of a trend often begins with the structural breakdown at the smallest level and gradually transmits to larger levels.
Some reversals are driven by strength, while others are driven by structure. The technical issues involved are quite simple, such as the breakthrough of support and resistance. The consensus driven by strength is usually maintained. You can understand strength as the first wave of the trend, which is very important. Therefore, as long as a certain level shows strength, the first wave of the new trend has arrived. Following this line of thought, the essence of continuation and consolidation can be understood.
Three modes of level interaction
In practice, we observe a stable interaction pattern between levels. First is the transmission mode: changes at the smaller level gradually transmit to the larger level; second is the suppression mode: the state of the larger level constrains the development space of the smaller level; finally, the resonance mode: when multiple levels send out the same signal, it generates powerful trend momentum.
Understanding these patterns is crucial for judging the nature of the market. For example, when a higher level is in a strong state, smaller level consolidations often receive buying support at key support levels; conversely, when the higher level trend weakens, the same smaller level consolidation may fail to hold support, thus becoming a starting point for reversal.
The criteria for judging structural integrity
The key to judging whether a trend is healthy lies in observing its structural integrity. A healthy trend should possess the following characteristics: first, the driving waves of the trend should be clear and strong; second, the amplitude and duration of the corrective waves should be within the normal range for that level; finally, prices should find support or resistance at key technical levels.
When we notice that the trend structure at a certain level begins to show abnormalities—such as excessive amplitude of the corrective wave, overly prolonged corrective time, or prices failing to find support at key technical levels—this is an early signal that the trend may weaken.
In trading practice, the first insight that level thinking brings us is to maintain confidence in the primary level trend while being patient with secondary level fluctuations. When we confirm that the higher level trend is still intact, we should understand that all the oscillations at the smaller level are merely necessary adjustments in the progress of the trend. This understanding helps us maintain strategic stability amid market noise.
Specifically, when we are in a clearly defined primary level trend, any reverse fluctuations at the secondary level should not shake our fundamental position. On the contrary, these reverse fluctuations provide us with better entry or scaling opportunities. The key is that we must be able to accurately distinguish what constitutes a normal adjustment and what indicates the beginning of a trend reversal.
A breakout after a consolidation often serves as a confirmation signal for trend continuation and is also the best entry point for risk-reward ratios.
At the execution level of trading, the most important principle is to ensure 'current safety.' No matter how strong our conviction about the higher level trend is, if the position at the current level is at risk, all long-term prospects will lose meaning.
This principle is reflected in the following: first, always clearly know your stop-loss position; second, the size of the position should be controlled within a range that can withstand normal fluctuations at the current level; finally, when the market proves our judgment wrong, we must be brave enough to admit it and exit immediately.
All stop-loss decisions must be based on the actual situation at the current level, rather than on expectations of the higher-level trend. This is a counter-intuitive but crucial principle. We often see traders tolerating obvious breakdowns at the current level because they are optimistic about the higher-level trend, resulting in small losses turning into large losses.
The correct approach is to set clear stop-loss standards at the current level. When this standard is triggered, execute immediately without considering how the larger level is trending. If the larger level trend is indeed as we expect, we can re-enter after stabilizing at the current level.
When we truly understand the essence of level thinking, we will complete the transition from predictive traders to reactive traders. We will no longer try to predict how the market will move, but rather focus on observing how the market is moving and then respond accordingly.
The deeper meaning of this transformation is that we acknowledge the unpredictability of the market, but at the same time believe that we can respond to various possible market states by establishing effective response mechanisms.
Ultimately, all our technical analysis and level judgments are aimed at building a trading system with a probabilistic advantage. This system cannot guarantee that every trade is profitable, but it can ensure positive expected value through long-term repetition.
Understanding this, we will realize that judging whether it is a continuation or a reversal does not require 100% accuracy. We only need to achieve a slight advantage on the probabilistic scale and then convert this advantage into long-term stable profits through strict execution.