In the previous article, we compared two traders: A (a day trader) made 1,000 trades a year with a 50% win rate, netting between -100,000 and +150,000 yuan. B (a trend trader) made only 15 trades a year with a 30% win rate, yet steadily earned 350,000 to 450,000 yuan. The core lesson was that profitability depends not on how hard you work, but on the trading model you use.
So, the question is: how did B select those "15 trades"? The answer lies not in technical indicators, but in the ability to classify the market. This article is here to help you build that "Trend Measurement Ruler."
Where Most People Go Wrong: Confusing Noise with Signals
Have you ever seen a commodity suddenly surge in volume, thought "this is my chance," and jumped in, only to see it reverse the next day, leaving you trapped? After holding for a few days, you sold at a loss. Then, a month later, you look back and see that commodity did indeed have a major move—you just got shaken out.
You didn't get the direction wrong; you misjudged the timeframe. The market fluctuates every day, but not every fluctuation is worth trading. Distinguishing between these three levels is the first and most important lesson in trading. The key difference between these levels is not the size of the candlestick, but the persistence of the underlying driving logic.
Small-scale fluctuations are driven by sentiment: money flows in today, profits may be taken tomorrow. They come and go quickly.
Medium-scale swings are driven by temporary imbalances: a factory maintenance shutdown, a monthly data point exceeding expectations. Their impact is often digested within weeks.
Large-scale trends are driven by irreversible structural changes: permanent capacity elimination, explosive demand growth, a shift in the macro cycle. These imbalances take months to play out.
This series is about how to capture the top layer—the leading varieties within large-scale trends.
Four Essential Criteria for Identifying a Major Trend
How do you determine if a move is a "major trend"? All four conditions below must be met simultaneously. Missing even one disqualifies it.
Criterion One: Supply-Demand Imbalance
This is the most fundamental driver. It's not about "inventories dropping for a week." It's about:
Permanent supply-side capacity elimination (e.g., industrial policy mandating capacity cuts of 30% or more).
Explosive demand-side growth (e.g., new energy policies creating a doubling of demand).
Inventories showing a trend of de-stocking or re-stocking for four consecutive weeks or more, with the rate accelerating.
The key question: Is this supply-demand change a "temporary repair" or "permanent capacity exit"? The former is excluded; the latter is included.
Criterion Two: Macro-Economic Alignment
The macro economy acts as an amplifier for trends. Without macro support, industrial imbalances rarely produce a smooth, major trend.
Bullish alignment: Industrial supply contraction + Macroeconomic easing (rate-cutting cycle, economic recovery).
Bearish alignment: Industrial demand contraction + Macroeconomic tightening (rate-hiking cycle, economic recession).
Non-alignment (caution): Positive industrial fundamentals + Negative macro environment → likely a choppy rally, with no smooth trend.
Criterion Three: Price Breakout Confirmation
This is not a daily-level breakout, but a weekly-level confirmation:
Breaking through the 250-day moving average (annual line) or the highs/lows of the past 1-2 years.
Breaking through the upper or lower boundary of a long-term consolidation range.
Holding above the breakout level for 3-5 trading days, not a one-day false breakout.
Criterion Four: Sustained Capital Inflow
The total open interest of the main contract must hit a new yearly high or show sustained growth for two consecutive weeks or more. This indicates that capital is not making a one-day visit but is positioning based on a long-term logic.
These four criteria are like four locks. Only when all are unlocked can you call it a major trend.
Five Key Traits of a Leading Variety
Within an industry chain, if a major trend is confirmed, does that mean all varieties are good buys? Absolutely not. Some are "leaders," rising fastest and falling least. Others are "followers," lagging on the way up and falling hardest on the way down. Choosing the wrong variety can significantly reduce your profits even if your direction is correct.
Here are the five key traits of a leading variety, in order of priority:
Trait One: Leads the Industry Chain
This is the most important. Within the same industry, the leader breaks through a key technical level first and shows significantly greater price movement than other varieties.
Energy sector starts → Crude oil rises first → Fuel oil and PTA follow.
Non-ferrous sector starts → Copper rises first → Aluminum and Zinc follow.
Vegetable oil sector starts → Palm oil rises first → Soybean oil and Rapeseed oil follow.
Trait Two: Capital Concentration
The main contract's total open interest and trading volume rank first in the industry. The net long or net short positions of the top 20 seats maintain a consistent directional increase for several days. Institutional capital consensus is far more convincing than retail sentiment.
Trait Three: Basis and Term Structure Leadership
Spot prices are trending up/down, and the basis is strengthening/weakening. The term structure shows a trend of near-month contracts being stronger than far-month (backwardation widening) or far-month being stronger than near-month (contango widening). This indicates a high degree of consensus in the market's expectations.
Trait Four: Industry Chain Influence
The price movement of the leading variety can effectively drive upstream and downstream varieties. When copper rises, aluminum and zinc follow. When palm oil falls, soybean oil and rapeseed oil weaken in sync.
Trait Five: Volatility Resistance
During a major trend, when the market experiences a short-term pullback, the leading variety's decline is far smaller than that of other varieties in the chain. Furthermore, open interest increases or holds steady during the pullback, indicating that capital is holding firm, not fleeing.
A Quick Screening Tool: ADX + Open Interest
The four criteria and five traits above require time to analyze. But is there an indicator that can give you a quick, preliminary judgment of a trend's strength in just seconds? Yes. The combination of the ADX indicator and changes in open interest is the simplest and most effective quantitative tool for identifying major trends.
What is ADX?
The Average Directional Index (ADX) measures the strength of a trend.
ADX > 25: The market is in a trending state.
ADX < 20: The market is in a range-bound, consolidating state.
ADX rising: The trend is strengthening.
ADX falling: The trend is weakening.
However, using ADX alone has a problem—it only looks at price, not capital. Therefore, it must be used in conjunction with open interest for cross-verification.
A Simple Operating Rule
Open any charting software, pull up a weekly chart, and add the ADX indicator. If:
ADX < 20 → Close it. This is a range-bound market; don't bother.
ADX > 25 and rising + Open interest increasing → Open your fundamental analysis tools and start researching the supply-demand imbalance.
If the supply-demand imbalance also aligns → This is one of those "15 trades."
See, the first filter from 1,000 trades to 15 trades is right here.
Conclusion and Preview
The core of this article is to help you build a framework for market classification:
Small-scale fluctuations → Actively ignore. Don't think about them.
Medium-scale swings → Cautiously consider. They are optional.
Large-scale trends → Dedicate full effort. Conduct in-depth research.
To identify a major trend, we have two paths:
The complete method: Four Criteria + Five Traits (time-consuming, but thorough).
The quick screening method: ADX > 25 + increasing open interest (saves time, for initial screening).
After the last article, many said it was a "painful truth." This one is meant to show you a clear path: the market isn't too difficult; you've just been putting your effort in the wrong place.
In the next article, we'll enter the first step of real-world application: how to dig out the core contradiction that can change the supply-demand landscape from a sea of information. We'll provide you with an "Information Classification System" and a "Three-Question Method for Deep Analysis."
Article 3: How to identify the core contradictions that change supply and demand from news and information? With the daily flood of news, which ones are worth reading, and which are just noise? When a piece of news arrives, how do you judge if it can trigger a major trend? Follow this series and gradually elevate your trading cognition.
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