Chaos theory in fx trading

Beginner Questions
1

I am sure you heard of this before and i believe that the company that created fractals and the alligator mouth were the ones that used a form of chaos theory. It’s actually quite well entrenched cos mt4 has alligator indicator in it.

Personally for me it didn’t really work out too well. Maybe cos i didn’t test it long enough. Anyway i read more on chaos theory not just the book from the creators of the alligator and fractals whom i believe are from a company called profitunity.

The chaos theory book described the markets pretty well that there’s always a period of time you cannot read the markets properly. It just doesn’t make any sense or rather it’s pattern isn’t a simple pattern but a more complicated pattern maybe somthing that follows fib numbers. The problem was the book kept on rambling on how the market was chaotic but there wasn’t any solution to it. Kept on saying oh in future when computers get better etc they can calculate it which disappointed cos it was quite a thick book around 300 pages and they didn’t even aid me.

Anyway the question is do you think there is a pattern in chaos? Sounds contridictory but maybe the pattern in chaos isn’t a straightforward pattern. Like let’s say for example dusk and dawn they both follow one another it’s daytime it will be nighttime and then it will be daytime it won’t be daytime and then daytime keeps ongoing and then nighttime and then day time doesn’t go. Perhaps chaos theory would be dusk and dawn in the artic area. You know it’s like day time for 6 months then night time. For someone that has not lived there before he doesn’t know about this and things it’s chaotic but it does follow a pattern just not a simple pattern the rest of the world does but a more complicated one.

Then again it seems like the markets sometimes do move randomly but it’s just a few times not all the time. Sometimes it follows a pattern then moves erractically.

Honestly speaking how is it possible to learn chaos theory and then apply it to trading considering that they probably don’t even have equations or math equations in the conventional sense to calculate it.

2

Hey Snake24, nice question!

This is outside my sphere of knowledge, but there is certainly an article that I found very useful in explaining the ‘herd’

mentality of market forces: hard to believe it, but possible, that something as complex as a market (e.g. the equities

market, or the Forex market) behaves like a giant, sentient organism:

3

snake24,

Here are links to two youtube vids re: Bill Williams and his Trading Chaos Theory. Pay attention to the butterfly theory. :wink:

Trading Chaos: A New Map for Traders by Bill Williams

The Holy Grail to Trading by Bill Williams

.

4

Watch these birds — Murmuration on Vimeo

Do you see [I]order[/I] or [I]chaos.[/I] (I would say [I]yes,[/I] and [I]yes.[/I])

5

Interesting qudestion. One I also have ponder.

Chaos as defined by Edward Lorenz
"When the present determines the future but the approximate present does not approximately determine the future"

So the question is does the current state of the markets determine the future. I believe no because of random events ie SNB. Chaos theory can only be applied to deterministic systems. A deterministic system is one in which no randomness is involved in the development of future states. The market is very open to random events, market manipulation.

So even though I do spend hours pondering this IMO chaos theory can’t be applied to the markets.

Love the topic and keen to hear many other views

Bob

6

I would have to disagree with you. The market is basically a representation of human behavior, which is not random at all.

But I am not all knowing. This is just what I have learnt and what has proven to be true to me and what has helped me with my trading. Nevertheless, it is still just my opinion on the matter and I am in no way saying you are wrong or I am right, just a difference of opinions.