The Market is a Product of Chaos - The Science of Chaos

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immy
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The Market is a Product of Chaos - The Science of Chaos

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The Science of Chaos

The Science of Chaos deals primarily with natural phenomena. One of Mandelbrot's pregnant findings was that
the fractal dimensions of rivers are similar to those of commodity and stock markets, which is an
indication that the markets are more a function of nature than a process designed by the left
hemisphere of the human brain.


Our view is that economics fundamentals and technical/mechanical analysis do not draw an accurate map of
the market's behavior.

The Science of Chaos provides three primary principles for the study of markets. Collectively,
these principles govern the behavior of energy.

1. Everything in the universe follows the path of least resistance.

The markets are like a river. As they move through each trading minute, they take the
path of least resistance. That's what we all do—you, me, the markets, everything in nature.

It is part of the inherent design of nature. While a river is running downstream,
the path of least resistance determines its behavior. Gravity is energizing it as it flows around
rocks and along curves in the riverbed.

You are reading this sentence at this time because this was the path of least resistance when
all your time management factors were examined. You are sitting wherever you are because
that location was on your path of least resistance. In the market, you will exit from a losing
trade when the pain of losing one more dollar becomes stronger than the pain of saying that
you were wrong to be in the trade. The path of least resistance will win again.

2. The path of least resistance is determined by an always underlying and usually unseen
structure.
The behavior of a river, whether it is calmly flowing downhill or creating rapids,
depends on the underlying structure of the riverbed. If the riverbed is deep and wide, the river
will flow calmly downhill. If the riverbed is shallow and narrow, the riverbed will create
rapids. The behavior of the river can be accurately predicted by examining the underlying
riverbed. If you could see the bottom, you could accurately predict the behavior of the river at
that point.

Many traders who keep repeating their trading behavior produce losses. They often
feel powerless and frustrated. They attend seminars, read books and underline appropriate
passages, study NLP (Neuro Linguistic Programming), have private sessions with market psychologists,
and then find themselves back in the same old losing rut.

If that has happened to you, you simply haven't changed your underlying structure.

Permanent changes happen only when you alter the riverbed, the underlying structure. As a
trader, you always know when you are trying to go against the path of least resistance.
Tension immediately builds up in your body and mind. If you are tense about trading, you are
not "floating down the river."
Once you learn to determine the underlying structure of a
market, you can make peace with the behavior of the market and simply "float like a butterfly,
sting like a bee."

3. The always underlying and usually unseen structure can be discovered, and it can be
altered.
You can change the flow of your life and your trading. To do this easily and
permanently, you must work with the underlying structure rather than the behavior produced
by that underlying structure.

The basic concept derived from these three principles is this: you can learn to first recognize
the underlying structure that is driving your trading, and then change it so that you can create
what you really want from the markets. Structure determines behavior. Structure determines
the way anything behaves—a bullet, a hurricane, a cab driver, a spouse, a market. The way the
pits are structured determines the behavior of the traders in the pits.

The structures that have the most influence on your trading results are
composed of desires, beliefs, assumptions, and, most of all, your understanding of the underlying
structure of the market and yourself.

As Robert Fritz notes, "You can't fool Mother Structure ."

Bill Williams, New Trading Dimensions 1998
What is the Secret of Successful Trading?
The Consistent Pursuit of DS1 :nerd

The thing that makes me money in trading is when I "Objectively Follow my Trading Plan".

I understand that I can't catch all the moves or all the signals but my objective is to catch THE VALID SIGNALS & ONLY the Valid Signals.

My Deathbed Advice "5:1 Reward to Risk Ratio".

Yo, banana boy! 🍌
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immy
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MARKETS AND THE STRUCTURE OF REALITY

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MARKETS AND THE STRUCTURE OF REALITY

By understanding and appreciating the underlying structure in the cosmos, we can gain insight
into the machinations of the markets.
The first outstanding feature is that the "laws" of nature
are flexible, not rigid as once thought by classical physics.

This insight will expose the failure of traditional classical technical analysis,
which falls into the same traps that classical physics has created over the centuries.
In fact, the modern "laws" of the universe are more closely allied with the Taoist-Buddhist view than
that of western civilization. It seems that the nature and structure of the universe are in a
never ending flux. Chaos theory supports this hypothesis.

Chaos theory tends to focus on process; classical physics tended to focus more on content.
Chaos tends to confirm the process philosophy of Kant (subjectivism) and the model put forth
by Heraclitus.
Chaos theory, then, is a revolutionary theory with a historical backdrop of Kantian "possibility" and
Heraclitian never-ending flux. This viewpoint more accurately explains the events of astronomy, biology,
chemical and creative forces, dripping faucets, the earth's magnetic field, economics, galactic orbits,
health, the human heart, the flow of traffic, the use of language, and, for traders, the behavior of the markets.

Examining how other researchers have described Chaos may give some additional insight into this new gestalt or
worldview. Joseph Ford describes Chaos as "Dynamics freed at last from the shackles of order
and predictability... systems liberated to randomly explore their every dynamic possibility....
Exciting variety, richness of choice, a cornucopia of opportunity."

Hao Bai-Lin, a physicist in China, describes Chaos as "a kind of order without periodicity. . . a newly recognized
ubiquitous class of natural phenomena."

Roderick V. Jensen defines Chaos as "the irregular, unpredictable behavior of deterministic, nonlinear systems."
This brings up an interesting question:

How can you have unpredictable behavior in a deterministic system? We are jolted
back to the Aristotelian statement that something cannot be both A and not A. Chaos theory,
like quantum science, takes issue with Aristotle, and many experiments show that some things
both are and are not at the same time
.

It is almost a kind of mysticism if we follow the old Aristotelian logic.
Douglas Hofstadter wrote: "It turns out that an eerie type of chaos can lurk
just behind the facade of order and yet, deep inside the chaos lurks an even eerier type of
order." All randomness has a pattern deeply imbedded in it. This is the underlying structure of
both the world and the markets.

My trading approach attempts to trade this underlying order rather than the seemingly random
outcroppings we see on the computer screen.


Everyday examples of Chaos, other than in the markets, can be seen all around us in the weather, the
flow of traffic, and the cycles of living. In the weather, for example, we can predict at a
general level, but at another level the weather is random and unpredictable. We know that
midsummer days are generally warmer than midwinter days. The ranges of temperatures for
the summer season and the winter season are somewhat predictable. But the exact temperature
is much less predictable. In the market, there are general long-term cycles that are somewhat
predictable, but predicting the end of a current cycle is much less precise.

One of the key findings of Edward Lorenz, a pioneer in Chaos theory at Massachusetts Institute of
Technology, was that the "noise" that other meteorologists had discarded was really a primary
part of the map being drawn by the data.

Most scientists and traders are trained in linear thinking and tend to explain all behavior in
Newtonian terms, but Chaos has revealed that nonlinear thinking draws a more accurate map of
puzzling situations.

These scientists have found that "educated intuition" becomes an important factor in solving problems and can be
of great benefit in extracting profits from the markets.


Lorenz coined the term "Butterfly Effect" in explaining how small changes in initial conditions change the outcomes of larger
patterns. On the day that this is being written, the national unemployment was announced at a
percentage that was slightly better than expected. This caused bonds to make an almost
record-breaking downward move, and the Dow dropped over 114 points—the seventh largest
drop in its recorded history. This non-Newtonian behavior can also be seen in the flow of
traffic.

You usually can estimate how long it will take to go into town because the flow of
traffic is about the same every day. But we know all too well how the Butterfly Effect takes
over when there is an accident during rush hour. According to Einstein, the universe is one
extremely large piece of matter with the characteristic that it is unchanging in material mass
but constantly changing in shape. Could that also be an accurate assessment of the markets?

This conclusion comes from taking the E = mc2 equation seriously. When you think about
mass being energy, then everything is really the same thing
, as so eloquently pointed out by
David Bohm.

Bill Williams, New Trading Dimensions 1998
What is the Secret of Successful Trading?
The Consistent Pursuit of DS1 :nerd

The thing that makes me money in trading is when I "Objectively Follow my Trading Plan".

I understand that I can't catch all the moves or all the signals but my objective is to catch THE VALID SIGNALS & ONLY the Valid Signals.

My Deathbed Advice "5:1 Reward to Risk Ratio".

Yo, banana boy! 🍌
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immy
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Re: Chaos Versus Analytical View of The World and The Market

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Chaos theory stands in stark contrast with analytical theory. Analytical theory is exacting, but
the area that it can accurately describe is quite limited. It is confined to that small domain of
empirical, verifiable experience that can be broken down into smaller parts and then analyzed.

It seeks "universal truths" within a very limited and specific domain.

It can be useful in some contexts, but domains such as the behavior of the markets cannot
be fully understood using these tools. Chaos theory also analyzes, but it demands few limits
within the domain of human experience and behavior.


Both classical and Chaos scientists study empirical data, but
classical analysis tends to ignore data that Chaos acknowledges.

In fact, the value of Chaos philosophy is that it finds real meaning in what classical analysts
describe as random data.

We have a strong tendency to discard data simply because they do not fit into our preconceived
categories
when we describe behavior in turbulence and living systems. The classical
approach to both science and the analysis of markets contains too many filters, stiff
perspectives, and levels of intersubjectivity to teach us what is really going on "out there."

Chaos points in the direction of finding patterns and structures within different levels of
inquiry.


For example, are you just a collection of cells that operates like an ant colony? Where do you
start your inquiry—with the whole or by analyzing each cell (ant)
? In medicine, for example,
we have foot specialists, knee specialists, internal organs specialists, and so on. If we put all
of these observations together, do we get an accurate picture of a person?

No.

Neither can we get a picture of the market by adding up a number of technical indicators.

Chaos theory gives us the challenge of a new metaphysics. It focuses on what's happening
right now, which deserves much more attention in market analysis.
Chaos theory meets the
challenge of looking at this larger picture, capturing the whole of the market-river as it flows
ever onward, creating all sorts of little surprises along the way.

Noting the ongoing changes in the flow is the challenge of real market analysis and is the
antidote to dogmatism, the most fatal disease to traders.
(I humbly suggest the reader - re-reads this phrase-Immy)

Chaos is the new and exciting way to view the changes in market movement.
Bill Williams, New Trading Dimensions 1998
What is the Secret of Successful Trading?
The Consistent Pursuit of DS1 :nerd

The thing that makes me money in trading is when I "Objectively Follow my Trading Plan".

I understand that I can't catch all the moves or all the signals but my objective is to catch THE VALID SIGNALS & ONLY the Valid Signals.

My Deathbed Advice "5:1 Reward to Risk Ratio".

Yo, banana boy! 🍌
User avatar
immy
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Suggested Readings

Unread post by immy »

Suggested Reading:

"New Trading Dimensions - How to Profit from CHAOS in Stocks, Bonds and Commodities", Dr. Bills Williams,1998

"The Path of Least Resistance" by Fritz, Robert New York: Ballantine Books, 1989

"Fractals and Scaling in Finance", 1997; also, "Fractals", c1977, by Benoit Mandelbrot

"Chaos: Making a New Science", by James Gleick, 1987

"Chaos and Fractals : New Frontiers of Science" by Heinz-Otto Peitgen et al., 1992

"The Geometry of Fractal Sets (Cambridge Tracts in Mathematics, 85)" by Kenneth J. Falconer, 1986
What is the Secret of Successful Trading?
The Consistent Pursuit of DS1 :nerd

The thing that makes me money in trading is when I "Objectively Follow my Trading Plan".

I understand that I can't catch all the moves or all the signals but my objective is to catch THE VALID SIGNALS & ONLY the Valid Signals.

My Deathbed Advice "5:1 Reward to Risk Ratio".

Yo, banana boy! 🍌
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