Full Guide to Chip Distribution Analysis for Industries and Individual Stocks: A Practical Manual for Traders

Full Guide to Chip Distribution Analysis for Industries and Individual Stocks: A Practical Manual for Traders

1 Fundamental Analysis of Chip Distribution

1.1 Core Concepts and Market Implications

Chip distribution (also known as cost distribution) is a technical analysis tool that displays the holding cost structure of stocks. It calculates the volume distribution across different price ranges to visually present the concentrated areas of shareholding costs among market participants. In stock quotation software, chip distribution is shown graphically to illustrate the quantity of tradable shares held by market participants at various price levels. Due to its intuitive visual form, chip distribution exhibits distinct morphological features when measuring stock holding cost structures. These features directly reflect a stock’s cost structure, each with unique formation mechanisms and practical trading implications.

The core market implication of chip distribution: it aggregates trading volume executed at every price level throughout history to determine the current holding cost of all tradable shares in the market. It should be noted that part of the historical traded volume will be sold off in subsequent trading sessions. Therefore, historical transaction volumes cannot simply be accumulated to the present; a certain attenuation factor must be applied. This attenuation ratio is equivalent to the daily turnover rate. Chip distribution shows the number of shares held by investors at different price levels. As stock prices rise or fall, trading volume is generated across different price zones. The distribution of such trading volume at various prices forms the holding cost profile of the stock.

1.2 Analysis of Elements in the Chip Distribution Chart

A standard chip distribution chart contains these key elements: Color Markers

• Blue zone: Chips in a loss state at the current stock price (trapped chips). In other words, traders’ entry price is higher than the closing price on the selected date.

• Red zone: Chips in a profitable state at the current stock price (profit-taking chips).

• Black/white line: The average cost line for all held chips in the market, serving as the center of the entire cost distribution.

Chip Peak: A spike-shaped distribution on the price axis, representing a price zone with massive shareholdings that forms strong support or resistance. The strength of a chip peak depends on its height and concentration. Taller, more concentrated peaks deliver stronger support or resistance.

Chip Concentration: An indicator measuring how tightly chips gather within the main dense zone. A lower value means higher chip concentration. Generally, values below 10% indicate a highly concentrated state, suggesting a high probability of main fund control; values above 20% imply scattered chips with heavy retail investor participation.

1.3 Basic Rules of Chip Movement

Chip distribution follows predictable movement rules. Mastery of these rules is the foundation for effective chip analysis. Law of Support and Resistance

• Support Law: During a downtrend, stock prices receive support when falling to a lower dense chip peak. Once prices reach this zone, holders of chips in the dense peak remain unprofitable and reluctant to sell, halting the decline and forming price support. More chips in the lower dense peak mean stronger support. If prices break below this dense peak, the support fails and turns into future resistance.

• Resistance Law: During an uptrend, stock prices encounter resistance when rising toward an upper dense chip peak. Once prices reach this zone, trapped investors holding chips in the dense peak become break-even and tend to sell, triggering price pullbacks. More chips in the upper dense peak create heavier upward resistance. If prices successfully break through this dense peak, the resistance disappears and becomes future support.

Chip Transfer Rule: As stock prices fluctuate, low-cost chips gradually shift upward to higher price levels amid price rallies. The four stages of main fund operations (accumulation, rally, peak formation, distribution) correspond to specific chip movement patterns: scattered → concentrated at lows; locked low chips alongside scattered high chips; low chips transferred upward; dense chips formed at highs.

2 Identification and Trading Strategies for Eight Classic Chip Patterns

2.1 Single Peak Dense Patterns

Single peak density is the most fundamental and important pattern in chip distribution, indicating that a stock’s tradable chips are fully concentrated within a specific price zone. Based on the stock price position, it is divided into low single peak density and high single peak density, with entirely different market implications and trading strategies.

Breakout from Low Single Peak Density with Volume

Pattern Features: After a long consolidation period (usually 1–3 months), the moving chip distribution forms a single dense peak at lows. Subsequently, the stock price breaks out above the single dense peak with heavy volume. On the breakout day, the profit ratio exceeds 80%, showing highly consistent market costs and very few trapped chips above (no more than 10%).

Formation Mechanism: Main funds complete chip accumulation at lows with sufficient market handover, and early trapped investors have mostly cut losses and exited. A heavy-volume breakout signals a clear intention by main funds to launch a market rally.

Trading Strategies

• Open a 50% position on the breakout day (large bullish candle or daily limit).

• Add a 30% position on a post-breakout low-volume pullback that holds the upper edge of the chip peak.

• Place the stop-loss 3% below the lower edge of the chip peak. Typical case: Western Construction (002302) on March 20, 2017.

Pullback and Return to Single Peak Density

Pattern Features: After long consolidation forming a low single dense peak, the stock price suddenly falls below the single peak zone. However, the original dense peak shows no obvious reduction during the pullback, trading volume shrinks significantly, and the pullback amplitude is generally less than 20%.

Formation Mechanism: This is the final washout before the main rally, intended to clear floating chips and trend-following retail investors. Since main funds have not distributed holdings, the chip peak remains stable, demonstrating the trait of “price drops while chips hold steady.”

Trading Strategies

• Stay on hold when the price breaks the chip peak on shrinking volume.

• Establish a 20% observation position once prices stabilize back at the original single dense peak.

• Open a heavy 60% position upon a volume-driven breakout above the original single dense peak.

• Set stop-loss below the washout low point.

Upward Breakout from High Single Peak Density

Pattern Features: After a round of gains, a stock forms a single dense peak at highs, and the price breaks out above this high dense peak with renewed heavy volume, hitting recent new highs.

Formation Mechanism: After handover completes at highs, new capital takes over, or main funds launch a secondary rally. This pattern frequently appears in the second wave of strong stocks.

Trading Strategies

• Open a 40% position on the breakout day.

• Strictly place stop-loss at the lower edge of the dense peak.

• Trade quickly without long-term holding.

• Suitable only for seasoned short-term traders, subject to broader market conditions.

2.2 Multi-Peak and Special Patterns

Upper Peak Fading

Pattern Features: In a downtrend, the upper trapped dense peak is largely depleted (over 70% reduction), while a new single dense peak forms at lows. A sufficient prerequisite for an upward rally is the absence of massive trapped chips above prices; therefore, fading of the upper peak serves as a key trend reversal signal.

Formation Mechanism: After prolonged declines, investors holding high trapped chips gradually cut losses and exit. Main funds absorb chips at lows and finish accumulation, shifting the market cost structure from high trapped positions to low concentration.

Trading Strategies

• Confirm fading of the upper peak (chip proportion above <15%).

• Verify a newly formed low dense peak with concentration <12%.

• Enter positions when prices launch a volume-driven upward breakout.

• Hold mid-term until high chip density emerges.

Rising Multi-Peak Density for Continued Rally

Pattern Features: After a low single dense peak sparks an upward rally, consolidation during the rally forms one or more new dense peaks. When new dense peaks form, the original low peak shrinks but persists, creating a “chip relay” structure.

Formation Mechanism: Consolidation during the rally functions as washout. New peaks represent cost zones formed by handover, while the original peak proves main funds retain core positions. Each dense peak acts as strong support for pullback washouts.

Trading Strategies

• Hold positions and add holdings on pullbacks to the support of lower dense peaks.

• Be alert to main fund distribution if new dense peaks expand while the original peak shrinks rapidly (over 50%). Typical case: China State Construction during its rally phase in November 2016.

V-shaped Reversal toward Dense Peak

Pattern Features: The stock price quickly falls below the original single dense peak into the oversold zone, yet the original single dense peak remains intact. The pattern shows “price breakdown with stable chips.”

Formation Mechanism: Panic selling triggered by sudden negative news, but main funds do not flee in large scale. Once market sentiment recovers, prices quickly rebound back to the cost zone.

Trading Strategies

• Test a 20% buy position when reversal candlesticks (long lower wick, bullish engulfing) emerge in the oversold zone.

• Exit temporarily when rebounding to the original single dense peak zone.

• Re-enter if prices break through the original dense peak with heavy volume.

2.3 Trading Method for Twin Peak Density

The twin peak density pattern carries unique practical value, especially the “twin peak valley filling” pattern.

Pattern Features: After roughly one month of sideways consolidation, the stock drops sharply without pause during the decline, with a pullback exceeding 20%. After bottoming, the stock trades sideways on low volume for over a month, forming two dense peaks: an upper peak accounting for 30–50% of chips and a lower peak holding no less than 50% of chips. A distinct chip-free vacuum zone sits between the two peaks, and the lower dense peak contains more chips than the upper one.

Formation Mechanism: This pattern usually arises when main funds built high positions and became trapped or failed to distribute holdings amid broad market declines or company-specific negative news. The upper peak represents trapped chips; the lower peak is formed by main funds adding positions at lows.

Trading Strategies

• Confirm the twin peak structure and chip proportion requirements are met.

• Enter positions when the stock price breaks the lower dense peak with heavy volume and profit ratio exceeds 50%.

• Target the lower edge of the upper dense peak.

• Exit early if volume shrinks after rallying into the vacuum zone. Typical case: East Money (300059) on March 7, 2016.

3 Decoding Chip Features in the Four Stages of Main Fund Operations

3.1 Chip Features in the Accumulation Stage

The accumulation stage is the process of chips shifting from dispersion to concentration, with these typical traits: Chip Distribution Traits: The stock price fluctuates at lows, profit ratio stays below 20%, and abundant trapped chips remain above. Over time, chips gradually form a dense peak at lows, with concentration falling continuously below 10%. Volume follows a “stepwise expansion” pattern, or rises on volume and falls on shrinking volume.

Main Fund Behavior Analysis: Main funds repeatedly oscillate prices to force holders of upper trapped chips to cut losses, while absorbing sell orders at lows. Main funds are net buyers of chips during this phase, and retail investors are net sellers. Changes in chip concentration reflect accumulation progress better than price fluctuations.

Trading Strategies

• Mid-term investors may build small positions (≤20%) during low consolidation.

• Prioritize targets where concentration falls below 12% alongside mild volume expansion.

• Avoid heavy early positions; wait for volume breakout signals.

3.2 Chip Features in the Rally Stage

The rally stage is when main funds push prices away from their cost zone, with unique chip movement characteristics: Chip Distribution Traits: After prices break away from the low chip dense zone, core low chips held by main funds remain stable (retaining at least 40%), while new chip peaks form at higher levels. This creates a pattern of “locked low chips and scattered high chips.” As prices rise, profit ratio climbs above 80%, yet low-position chips do not shrink materially.

Main Fund Behavior Analysis: Main funds use partial capital to lift prices while keeping most holdings untouched. Retail investors chase gains and take profits repeatedly. Main funds rally while washing out floating chips, forming a “riding campaign.” Even with large floating profits, main funds show no signs of distribution, signaling a long bullish outlook.

Trading Strategies

• Hold positions and add holdings on pullbacks to the main fund cost zone (low chip peak).

• Use trend indicators (e.g., 20-day moving average) to capture the main rally wave. Typical case: Dian Diagnostics (300244) in February 2013.

3.3 Chip Features at Market Peak and Distribution Stage

Identifying market peaks and main fund distribution is the core value of chip analysis. Peak Stage Traits: The stock price fluctuates at highs, low-position core chips shrink rapidly (over 50% reduction), and chips transfer upward to high price zones. Turnover surges at highs (usually >20%) while prices stall. The 90% concentration index rises above 15%, indicating chip dispersion.

Distribution Stage Traits: A new single dense peak forms at highs, and low-position chips nearly disappear (<5%), meaning main funds complete distribution. Prices then break below the high dense peak, leaving 80–90% of chips trapped.

Main Fund Behavior Analysis: Main funds induce retail buying via price rallies and complete chip handover at highs. During distribution, false breakouts are often created to lure buyers, leveraging retail investors’ psychology of breaking even and trend-following to finish selling holdings.

Trading Strategies

• Reduce positions by 50% when low core chips shrink by 30%.

• Cut another 30% of holdings when low core chips shrink by 50%.

• Fully exit when prices break below the high dense peak. Typical case reference: China State Construction in December 2016.

4 Industry Chip Characteristics and Comparative Analysis

4.1 Chip Traits of Consumer Industry

Consumer stocks (liquor, food & beverage, pharmaceuticals, etc.) display distinctive chip distribution features: High Chip Stability: Main funds hold positions for long cycles, averaging 1–3 years. Low accumulation periods usually last over 6 months, forming highly concentrated single peak density (concentration often <8%). For example, Kweichow Moutai formed a low dense peak at 1422 yuan in 2025 with concentration of only 8.8%.

Rally Characteristics: “Stepwise uptrend.” After every 30–50% gain, a new chip peak forms while most core low chips are retained. Even amid pullbacks during the rally, retention of core chips usually stays above 60%, showing long-term bullish conviction from main funds.

Trading Strategies

• Suitable for mid-to-long-term investors; enter on breakout from low single peak density.

• Hold until chips disperse at highs (concentration >20%).

• Pullbacks to the mid-term chip peak (e.g., 90-day cost moving average) present adding opportunities.

4.2 Chip Traits of Tech Growth Industry

Tech stocks (semiconductors, software, new energy, etc.) see fast chip rotation and sharp volatility: Rapid Chip Conversion: Main fund operation cycles are short (3–6 months). Accumulation often adopts “jumping collection” and forms multiple dense zones. During rallies, core low chips have weak locking; core chips may shrink over 40% within a single rally wave.

Volume-Price Features: Highly sensitive to volume changes. Breakouts require obvious heavy volume (turnover >5%). High distribution features are prominent, often with “one-day massive chip transfer,” meaning core low chips drop more than 30% within a single trading day.

Trading Strategies

• Swing trading with holding cycles of 1–3 months.

• Chase breakouts and strictly cut losses on breakdowns.

• Watch for sharp single-day reduction (>20%) of core chips at highs.

4.3 Chip Rules for Cyclical and Financial Industries

Chip distribution of cyclical and financial stocks is heavily influenced by industry fundamentals. Cyclical Stocks (resources, chemicals, etc.)

• Chip density at lows coincides with industry loss cycles.

• Distribution happens quickly at highs, often forming a “double-top chip” pattern.

• Trading tip: Beware of chip dispersion when industry PE reaches high levels.

Financial Stocks (banks, securities, etc.)

• Securities stocks are sensitive to broad market trends and form low density early in bull markets.

• Bank stocks have highly stable chips but low elasticity, suited for dividend reinvestment strategies.

• Trading tip: Follow securities stocks when CSI 300 breaks out with heavy volume.

Chip analysis directly visualizes cost structures and requires continuous validation and revision in real trading. Successful trading does not predict the future; it interprets the current game dynamics of market cost structures and participant psychology. With consistent tracking and application over 3–6 months, investors can gradually build a chip-based trading system and deepen understanding of market nature to improve trading win rates.