Nei means internal and Dan means elixir. Thus, Nei Dan means to build the elixir internally. Here, internally means in the body instead of in the limbs. Whereas in Wai Dan the Chi is built up in the limbs and then moved into the body, Nei Dan exercises build up Chi in the body and lead it out to the limbs.
Generally speaking, Nei Dan theory is deeper than Wai Dan theory, and it is more difficult to understand and practice. Traditionally, most of the Nei Dan Chi Kung practices have been passed down more secretly than those of the Wai Dan. This is especially true of the highest levels of Nei Dan, such as Marrow/Brain Washing, which were passed down to only a few trusted disciples.
We can also classify Chi Kung into four major categories according to the purpose or final goal of the training: 1. maintaining health; 2. curing sickness; 3. martial skill; and 4. enlightenment or Buddhahood. This is only a rough breakdown, however, since almost every style of Chi Kung serves more than one of the above purposes. For example, although martial Chi Kung focuses on increasing fighting effectiveness, it can also improve your health. The Taoist Chi Kung aims for longevity and enlightenment, but to reach this goal you need to be in good health and know how to cure sickness. Because of this multi-purpose aspect of the categories, it will be simpler to discuss their backgrounds rather than the goals of their training. Knowing the history and basic principles of each category will help you to understand their Chi Kung more clearly.
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