What is Chaos theory?
Chaos theory - is an interdisciplinary scientific theory and branch of mathematics focused on underlying patterns and deterministic laws highly sensitive to initial conditions in dynamical systems that were thought to have completely random states of disorder and irregularities.
Chaos Theory in the Markets
Chaos theory is a controversial and complicated theory that has been used to explain some features of systems that have traditionally been difficult to accurately model. The financial markets fall into this category with the additional benefit of coming with a rich set of historical data. One interesting financial phenomenon that chaos theory can help illustrate, if not explain, is how seemingly healthy financial markets can suffer sudden shocks and crashes.
Trading Bot based on Chaos Theory
Proponents of chaos theory believe that price is the very last thing to change for a stock, bond or other security. This suggests that periods of low price volatility do not necessarily reflect the true health of the market. Looking at price as a lagging indicator puts investors in the dark as far as being able to spot crashes before they happen. This does, of course, fit the experience of most investors who have experienced black swan events and financial meltdowns. There are some who seem to be able to position themselves for market downturns in advance, but they are often digging much deeper than price data to understand structural weaknesses that most of the market has overlooked.
Why volatility is important in Chaos markets!
Let’s look at the example below as we see both cryptos trading sideways but GMT/USDT is showing more advantages for traders as it’s showing larger intraday swings that give traders more opportunities for making day trading returns.
How to find volatile assets?
Prices change when events are different from what the market has expected them to be. That’s why it’s very important to find news-driving assets. With the higher volume and use the volatility filter indicators like the Average True Range indicator, to cut-off assets that move like dead dogs.
