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Harvey1

How Can the Chaos Theory Be Applied to Forex?

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How Can the Chaos Theory be Applied to Forex?

 

Chaos Theory is a mathematical theory that studies systems, and how small differences in their initial conditions can have majorly differing outcomes. This is often explained and related to as the butterfly effect. This theory is that a small initial condition such as a butterfly flapping its wings could cause a large difference such as a change of weather on the other side of the world.

 

Famous forex trader Bill Williams was one of the first to suggest that Chaos Theory could be applied to the markets, and devised a strategy behind it. The principle behind his ideas is that psychology plays a large part in success, and that the key is to find determinism within events in the market.

 

Traditionally, traders will use technical and/or fundamental analysis to work out which way they think prices are going to move, but Bill Williams believes that this is an inferior way of trading, because neither method works for the dynamical system that is the real markets.

There are two critical aspects that must be understood for Williams’ theory to work. The first is having confidence in your own judgement, and the second is proper understanding of the structure or dimensions of the market.

 

According to Williams, there are five dimensions to the market, and analysing each one will reveal further information, building a bigger picture each time. These sections are the following:

 

• Fractal – Trades should not be made before the first fractal appears; indeed, any signals from other dimensions can be disregarded initially. A buy fractal is five consecutive bars, in which the middle bar is the highest. The opposite configuration would be a sell fractal.

 

• Momentum – The Awesome Oscillator illustrates the current market momentum of the last five bars. They are compared with the previous 34.

 

• Acceleration / Deceleration – This dimension measures the acceleration and deceleration of the market momentum, by looking at the momentum and the five bar moving average.

 

• Zone – The fourth dimension is known as the zone, and appears when the momentum and acceleration (or deceleration) are of the same direction.

 

• Balance Line – The last dimension of the market is the balance line, which is the level at which the price would be if chaos was not having an effect on the market. This ‘chaos’ is any kind of information that might be hitting the markets. It is also described with the Awesome Oscillator. The idea is that it requires less energy for the price to move away from this line.

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No doubt small perturbations can disrupt flows, etc much more than would be casually predicted from what was initially apparent – but …

 

you got some splainin to do bub

particularly how any of the content before

According to Williams

has a dam thang to do with any of the content after

According to Williams
???

and how anything after

According to Williams

is anything but plain old technical analysis – mostly stolen from others whose work predates and far surpasses his.

 

What is presented above and in the book, imo, is not even a helpful 101 (or lower) introduction to chaos theory … it is such useless piggybacking on a science ‘fad’ ( with “dimensions” and everything :) ) that it is more harmful than helpful to noobs and developing traders, etc… Harmful ? Yes, for starters, because neither his stolen ‘nawsome indicator’ nor his ‘balance’ will test out to be real pointers to or indicators of actual auction/mkt bifurcations … omg. Anyone really going for applying chaos theory will drop Bill William's bulsht yesterday.

 

This is not such a demerit of the techniques as it is just letting peeps know none of the other oscillators, etc out there get at chaos theory any better or any worse than his “dimensions” and omg “fractals”. Those who are applying William's techniques are NOT tapping into chaos theory. They are simply applying pretty good TA.

 

None of the books and articles (and funds started up) around trading chaos theory from that era were any good. William’s book – as it pertains to chaos theory – is the worst of them all… as it was the only fake among them… (and probably sold the most copies :) let's nominate him for the golden C hall of fame )…

it would be much more honest if it were simply presented as a contribution to the body of ‘technicals’

 

 

Hate to be so hard on you on your first post in here, Harvey - but… until you really ‘splain…

like an article - that does not pretend ‘chaos’ - about applying william’s techniques would be welcomed….

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I expect Harvey 1 to continue explaining chaos theory as I never had the chance to go through it in depth.

Maybe zdo is right or not , I would like to know more about his view.

 

Hi livernik,

 

The markets have changed a great deal in the last few years as Quants have replaced Traders and now rule the markets.

 

If you watch the Price very carefully and monitor the ask-bid volume you will come to understand The Quants perspective.

 

From this knowledge you can devise a strategy to put you into the market and then pull you out again.

IMO this is time better spent than following TA history.

 

good luck

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Forex Theory is a money factory because it is very easy to earn, one easily earn a lot of money within a very short time. Many people become employed by this forex business. There are many ways to earn huge amount from the forex business consistently. You must start with a good capital, apply positive good strategy, seek proper experience and give proper time to take the profit.

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If you watch the Price very carefully and monitor the ask-bid volume you will come to understand The Quants perspective.

 

From this knowledge you can devise a strategy to put you into the market and then pull you out again.

IMO this is time better spent than following TA history.

 

This ''strategy'' , you mean some sort of ''feeling'' that comes out of experience after the careful obsevation and abandon indicators in general even the concepts of res and supp ?

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This ''strategy'' , you mean some sort of ''feeling'' that comes out of experience after the careful obsevation and abandon indicators in general even the concepts of res and supp ?

 

 

Hi livernik,

 

I would suggest that you only watch the price bars and concentrate on what bars you think best represent price (time, range, tic, vol) and what size bars you want.

 

If for example you chose 3 minute bars, at least you will understand what is unfolding before your eyes because you have weighed up the options and then made a choice.

This is quite different from using 3 minute bars because someone else mentioned them.

 

Supply/ demand will open up to you from watching price.

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The most important aspect of learning to trade is not to get ahead of Price.

Just relax and watch, relax and watch and you will be to understand how Price moves in waves.

Each wave can be separated by a battleground where longs and shorts fight for supremacy.

Sometimes the waves just reverse as though every Trader agrees on a change of direction.

But then again, every Trader cannot agree otherwise Price would stall because for every Bought Contract there must be a Sold Contract.

 

These simple little things are the guts of trading.

 

Try to place Indicators to one side until you establish a sense of confidence that you can follow Price ... at this point many things will become evident to you.

 

Much of what is written about Indicators here on TL is written by People who have not reached this point of understanding ... in fact many have not even tried to understand Price and so they are doomed before they even start.

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"This theory is that a small initial condition such as a butterfly flapping its wings could cause a large difference such as a change of weather on the other side of the world. "

 

Of course it cannot. It is used only as an exaggeration because of the butterfly looking graph in chaos theory. Chaos theory cannot be applied to forex because price moves in brownian motion which is stochastic, not chaotic. Most chaotic systems are deterministic. I guess some may use Chaos Theory as a buzzword of some kind. Keep in mind that chaos in the traditional sense has to do with numerical solutions that blow up because of accumulated errors in calculations. Nothing of that relates to the real world.

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Guest muhitalam

Thanks for sharing. I would like to know more about his view. can me brief me from where get more info about that? Very much looking forward to hearing from you

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