The secondary reaction wave refers to significant pullbacks in bull markets and substantial rallies in bear markets. Secondary reaction waves last no less than three weeks and typically retrace between one-third to two-thirds of the primary trend wave's movement. These waves are highly deceptive, often misleading investors into believing the primary trend has begun to reverse. This deceptive nature stems from the fact that the final secondary reaction wave will actually become the first wave of the next primary trend.
Dow, Hamilton, and Rhea all placed great importance on secondary reaction waves, considering them essential for the proper functioning of financial markets. They believed secondary reaction waves act as pressure valves for financial markets. During the development of primary trends, these waves help regulate supply-demand imbalances, preventing the primary trend from being disrupted by severe disequilibrium.
From the operational principles of secondary reaction waves, several corollaries can be drawn:
1. Identification of primary trend waves and secondary reaction waves cannot be done independently; it requires comparative study of their patterns and development processes.
2. Secondary reaction waves cannot have fixed patterns or models.
Since their market function is to deceive investors into making wrong decisions, secondary reaction waves must exist in variable forms, much like viruses in the biological world. Any analytical method claiming to describe these waves with fixed, accurate models should raise investors' suspicions, as this would be deceptive.
3. The non-fixed nature of secondary reaction waves underscores the critical importance of risk control techniques.
Their variability demands investors maintain cautious trading attitudes and be prepared to admit operational failures. Professional investors therefore flexibly employ techniques like market testing, position adding/reducing, and investment insurance to maximize risk control.
4. Investment returns primarily come from identifying and utilizing secondary reaction waves.
This investment philosophy differs markedly from what most methods advocate. As the operational diagram shows, truly effective analytical methods don't just describe primary trends alone, but accurately depict the transformational relationship between primary trends and secondary reaction waves.
