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pierre

Chaos Theory: What Is It?

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I read an introduction to chaos theory online and would like to ask if anyone is familiar with it. What exactly is chaos theory and how would one apply it to trading the markets?

 

I seems like an interesting theory to me but I have only touched the surface level of it. I would like to hear a more in depth description of the chaos theory. Thank you

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Pierre..

 

If you want to learn more about chaos theory as it supposedly pertains to making sense of the randomness of market action, you can read the books of Bill Williams. However, I own and have read them and from my own personal point of view, the money could have been better spent. Mind you, that is just my own personal opinion and others may not agree.

 

I am not at all suggesting his ideas do not have value but perhaps am suggesting that I perhaps did not see the valid practicalities as applied to trading the markets. Maybe the subject was too deep for me or perhaps our present understanding of chaos theory as it might apply to trading either has a long way yet to go or I simply just don't quite get it.

 

I have tried using the indicators designed by Williams for trading his ideas (fractals, alligator, awesome oscillator and such) but felt there were either too many false signals given or the signals were often far too late in a good number of cases. Now that may just be that I don't personally have sufficient background or training to implement the strategies and indicators properly so you would have to try them out for yourself and make your own assessment.

 

The actual books themselves frankly did not go too deeply into actual chaos theory so I am not even sure whether or not they are particularly good explanations of the field as it would apply to trading. Perhaps you can search the Net for others who currently trade such methods and are willing to share their experiences. I did not find that readily available in my own cursory searches. Williams is reportedly considered an absolute genius in some circles and a total crackpot in others.

 

I wish I could help you more but all in all, I guess I will admit the subject is still a bit deep for me and after 25 years as a banker, I recognize my current limitations and perhaps need something a teensy bit easier on the brain.

 

Happy Trading ;)

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I have tried using the indicators designed by Williams for trading his ideas (fractals, alligator, awesome oscillator and such) but felt there were either too many false signals given or the signals were often far too late in a good number of cases. Now that may just be that I don't personally have sufficient background or training to implement the strategies and indicators properly so you would have to try them out for yourself and make your own assessment.

 

Williams is reportedly considered an absolute genius in some circles and a total crackpot in others.

 

I'll go with the circle that considers Williams to be a marketer who will use whatever is new (at the time) to sell books, subscriptions or systems. Like ez I have used his stuff, bought the book, and moved on to more realistic strategies.

 

His stuff does NOT use chaos theory (I actually haven't heard of anyone using Chaos etc as part of a working trading strategy) but is a proprietary jumble of displaced mas and macds renamed to sound sexy. More snake oil sadly.

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Tsk! Tsk! Kiwi..

 

Here I was trying my very best to refrain from bashing the whole thing publicly and you've gone ahead and stirred the pot for sure heh, heh. Shame on you ha ha.. :D

 

Happy Trading

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Would you agree that chaos theory is a concept for market understanding and not to be mistaken for a trading strategy?

 

The chaos theory interests me because I feel there is pattern/order in chaos.

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Frankly Pierre...

 

For my own two cents, although non-linear dynamics is not a new idea, I personally consider chaos theory, in the form of fractals applied to predict short term markets, as nothing more than a mystical science at best at this stage. No doubt brilliant researchers will continue their quest of such theories and methods in hopes of some day being able to accurately predict stock prices and the like but come on.. how do you feel they do so far with predicting the weather after all this time, eh? Not too well if you ask me. I can still just stick my head outside, look up into the sky and do a better job than my high tech weatherman most days, even with all his access to doppler radars, research from chaologists, etc.

 

While I am too old and seen too much in Life to consider anything impossible any more, let me just suggest to you that even if they somehow achieved accurate predictability somehow through application of chaos theory, the markets as we presently understand them, at least as played by speculators, would cease to exist. Once proven accurate predictability exists, all the rules will have to be changed to eliminate the advantage of the predictors.

 

If you want to just take up the science as a hobby and you happen to be brainy enough to be a Mensa member or something, then go right ahead and knock yourself out. Otherwise, if you are truly interested in trading spend your time learning about price action and move up to a large enough time interval on your charts to feel as comfortable trading as you feel necessary.

 

Happy Trading ;)

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I agree...Chaos theory is some pretty heavy stuff, and I think to properly apply it would require a very, very large amount of commitment and mental resources that would go far beyond the scope of practicality for trading. That is assuming chaos theory would even truly have an application in the markets. Bear in mind, I'm just an old boy from Mississippi, but chaos theory seems like a very deep subject, and in my opinion I don't think one could truly grasp it from reading a book. This is all strictly my opinion of course.

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This is an interresting thread. One that needs a lot of personal reflection to fully get the most out of.

 

What is your view of a market and how does chaos fit into it?

The butterfly effect - one small cap could bring everything down, even if temporary.

Bifurcations. Beyond me there.

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Frankly, I don't think chaos theory matters at all with regard to trading.

 

You would be far better served to invest your time in understanding how the professionals move the market to and fro, whipping the retail traders into frenzies of fear and greed, while they accumulate and/or distribute their holdings at a profit to those same retail players. A decent understanding of dual auction theory and thus a smattering of market profile probably wouldn't hurt anyone either.

 

However, focusing on chaos theory in some attempt at getting a usable edge in the markets is probably so far out of the realm of probability (you do think in terms of probabilities as a trader now, don't you?) that no further time should be spent on it and we should probably just let this thread die a natural death right here.

 

I will go so far as to say this much... if you continue to trade using the same strategies, indicators and methods as most all the other retail traders, the professionals will continue to eat your lunch in short order.

 

There are frankly very few highly profitable traders on Earth who are going to share much of value with you until such time as what they want to share is either of dimished value or they are too old or too rich to trade any longer. If you are somehow lucky enough to find and apprentice with one of them, be sure to pay strict attention to whatever they teach you, as it is bound to be immeasurably better than the re-hashed poop claimed as trading wisdom from 99% of the so called trading gurus out there in the marketplace who are really nothing more than opportunistic marketers.

 

There is absolutely no substitute for learning the basics of the markets, a little crowd psychology and for investing tons of screen time actually trading the markets day after day, while examining your trades at the end of each and every trading day to glean what worked and what did not and more importantly, why. To think you can just buy a software program or take an expensive weekend course and become a trader is the height of foolishness and the more experienced traders will be most happy to take your trading capital as fast as you can put it on the table.

 

Do your homework (and I mean LOTS of it), trade a single market until you know it backwards and forwards and trade with a single contract (or two if you are one of those who likes to scale out and keep a runner) until you are consistently profitable. Here endeth the lesson.

 

Happy Trading...:D

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Frankly, I don't think chaos theory matters at all with regard to trading.

 

You would be far better served to invest your time in understanding how the professionals move the market to and fro, whipping the retail traders into frenzies of fear and greed, while they accumulate and/or distribute their holdings at a profit to those same retail players. A decent understanding of dual auction theory and thus a smattering of market profile probably wouldn't hurt anyone either.

 

However, focusing on chaos theory in some attempt at getting a usable edge in the markets is probably so far out of the realm of probability (you do think in terms of probabilities as a trader now, don't you?) that no further time should be spent on it and we should probably just let this thread die a natural death right here.

 

I will go so far as to say this much... if you continue to trade using the same strategies, indicators and methods as most all the other retail traders, the professionals will continue to eat your lunch in short order.

 

There are frankly very few highly profitable traders on Earth who are going to share much of value with you until such time as what they want to share is either of dimished value or they are too old or too rich to trade any longer. If you are somehow lucky enough to find and apprentice with one of them, be sure to pay strict attention to whatever they teach you, as it is bound to be immeasurably better than the re-hashed poop claimed as trading wisdom from 99% of the so called trading gurus out there in the marketplace who are really nothing more than opportunistic marketers.

 

There is absolutely no substitute for learning the basics of the markets, a little crowd psychology and for investing tons of screen time actually trading the markets day after day, while examining your trades at the end of each and every trading day to glean what worked and what did not and more importantly, why. To think you can just buy a software program or take an expensive weekend course and become a trader is the height of foolishness and the more experienced traders will be most happy to take your trading capital as fast as you can put it on the table.

 

Do your homework (and I mean LOTS of it), trade a single market until you know it backwards and forwards and trade with a single contract (or two if you are one of those who likes to scale out and keep a runner) until you are consistently profitable. Here endeth the lesson.

 

Happy Trading...:D

 

Yes a very good post indeed!

 

From a philosophical point of view chaos is existence, therefore impacting on everything. Can it be used as a strategy, I think not.

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Absence of proof, is not proof of absence.

 

Chaos Theory is a large field. It has various branches and sub-sets. To say that it can not have any relevance in the market seems a bit too much of a jump. Chaos theory seeks to find order in randomness. If you are a trend trader, then you believe that underneath the market's seemingly random nature there is an order (trend component). If you use Market Profile, you too believe that the market is not purely random. The Bell curve model is predicated on the existence of order. Order then leads to pattern. That the markets are fractal is not of any debate. The branch of Chaos Theory called Fractal Geometry studies the fractal nature of many things that occur in many places. Fractal Geometry as a field of study, would be applicable to financial markets.

 

Behavioral finance is often considered a branch of Chaos Theory. The markets are nothing if not behavioral. That is, the markets are made up of humans and humans are guided by emotions. We all know markets are driven by fear and greed. As VSA puts it: ".....They also understand human psychology. They know most traders are controlled in varying degrees by the TWO FEARS: the fear of missing out and the fear of losses.. The market seen as a composite of human beings and thus human emotions can be quantified and qualified in human terms. This is in part what Behavioral finance seeks to do.

 

So what's the rub? If your goal is academic, then Chaos Theory is applicable for creating theories and testing hypotheses. But If your goal is to trade the markets, Chaos Theory is nothing more than gobbledy gook. Trading the markets is simple, but not easy. It has everything to do with what the Big money players are doing. It has to do with price action and support/resistance areas. Trading is not about prediction. Traders seek to create an edge through high probability set-up, as defined by their trading methodology. Then they execute, not because they believe they can predict the future, but because they trust the set-up.

 

There is a lot less to trading than most people think.

 

Tape reading works because it focuses on what is real-price. Most indicators "fail" because they are complicate things. First, they are derivatives of price and hence have inherent lag. Next they use price as an input to predict price. Using variable A to predict variable A has some logical deficiencies. But predictions should not really be a trader's goal.

 

"Predictions are great, but when predictions and reality diverge, we must always go with reality. Analysis is great, but when analysis and reality diverge, we must always go with reality. Knowledge is great, but when knowledge and reality diverge, we must always go with reality. And what is reality? Price is reality."---Adam theory of Markets.

 

Chaos Theory is viable in the academic study of markets. It may have a real application in trading the market for some. But it is not necessary. Moreover, even if it is applicable, it moves the trader away from the essence: price and volume.

 

You want to be a tader. Learn to read the tape (price action). Learn to track the Big Boys and follow in their wake. You want to write papers and win Nobel Prizes...............

 

BTW Bill William's Squat indicator, which is a way of looking at price range and volume is viable because it focuses on price and volume. Of course, whether or not one considers Bill Williams' work, Chaos Theory is another question altogether.

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