The Complete Version of Dugu Nine Swords -- Three-Period Nested Dugu Nine Swords Complete Version -- Three-Period Nested Cryptocurrency Exchange Platform

Since I started investing in 2018, I have read countless classics, tried various strategies and tactics, stepped into all kinds of pitfalls, and endured numerous setbacks. By July of this year, I finally understood the core principles of the Dugu Nine Swords. But then I encountered new problems. The main issue was that the core principles were too rough, making it difficult to implement in practical combat.

According to the division of bull and bear phases based on the core principles, only the first phase—bull market’s first wave of upward movement, with liquidity turning points confirmed to be upward—is certain to have excess returns for brokerages. The second phase involves sideways consolidation, small-cap style, but it’s unpredictable which industries and individual stocks will outperform. The third phase, the early stage of a major rally—before the inflation turning point—sees excess returns in emerging industries, but it’s impossible to determine which specific industry will be dominant through the core principles. In the latter half of the third phase, after the inflation turning point, the style shifts to large-cap, cyclical sectors tend to have advantages. However, there’s no clear method for selecting specific industries and stocks. I initially thought brokerages would outperform during this phase, but it seems they might only have excess returns within a very short window, probably no longer than two weeks. After liquidity peaks, entering the fourth phase, cyclical industries tend to outperform, which is relatively certain. The scope of cyclical industries is smaller, so the difficulty should be lower. After inflation peaks, the bull market ends, and a bear market begins. The bear market only involves rebounds, but a few sectors and stocks may trend strongly, which weakens the guiding role of the core principles during this period.

From Mr. Wang, I learned the concept of a capacity core. By observing the capacity core, it becomes easy to fit industry cycles into the core principles without needing to fully understand the industry trends as Mr. Wang does. Therefore, choosing industries at different stages of a bull market becomes straightforward. Even in a bear market, this method can be used to identify sectors and stocks with excess returns.

From Mr. Bian, I learned the concept of the sentiment cycle. Although my data tracking of the stock market started with recording the put-call ratio data, I had always tried to combine it with the larger bull-bear cycles. The results were clearly not very good because the put-call ratio is monthly data, while a bull-bear cycle spans 4-6 years. Using such high-frequency data to depict long-term cycles is obviously mismatched. To solve this, I later added the Moutai indicator. Combining the Moutai indicator with the put-call ratio significantly increased the success rate in confirming market bottoms. However, there are still major issues in judging market tops. Of course, after understanding the core principles thoroughly, there will be no problem in identifying major bull and bear tops and bottoms, but the 3-6 month intermediate waves are hard to grasp. Holding through these periods can be very painful and inefficient.

Mr. Bian also created the concept of an emotion cycle. I haven’t studied his emotion cycle in depth because I know I lack an advantage in short-term trading, am older, have less physical stamina, and am not a full-time trader. But the concept of the emotion cycle has been very inspiring to me. Long ago, I observed that the A-share market has 2-3 index fluctuations each year. However, I never quite understood the reasons behind these fluctuations or how to grasp them.

Mr. Bian’s concept of the emotion cycle inspired me to realize that these 2-3 index waves each year are essentially individual emotion cycles. Since the put-call ratio is also monthly data, the match is very good. Through retrospective analysis, I found that combining the put-call ratio with the core principles’ bull-bear cycles can effectively depict the 3-6 month cyclical market movements of the A-shares. Within such a short timeframe, fundamentals are unlikely to undergo major changes. The main driving force should be the market’s risk appetite shifts—cyclical cycles of greed and fear—making the term “emotion cycle” very appropriate. Of course, this emotion cycle is probably not the same as Mr. Bian’s. If Mr. Bian minds, I can rename it as the “risk sentiment cycle.” If he doesn’t mind, I think “emotion cycle” is more fitting.

With these two issues addressed, the full version of the Dugu Nine Swords is now formed. By anchoring market stages through two key indicators (liquidity and inflation) to confirm bull-bear positions and market styles, and then selecting sectors with excess returns based on industry trends, as well as choosing buy/sell windows based on the position of the emotion cycle, the strategy is complete. The rotation within and between sectors and small waves can be optional.