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.
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.
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.
Thank you for sharing this. I ahve heard of this concept but have never really delved into it much.
As for trading “dead dogs,” since I am a 5-minute trader, I do gravitate to subdued markets, just because I feel safer. For example, I almost never trade FOMC or NFP, and I make sure I am flat beforehand.
I will even wait sometimes to trade late in Asia or NY, picking up five pips here and five pips there as the market consolidates. However, I know that most traders should not do that.
I see a real advantage to utilizing chaos theory for higher timeframes, however. You want a roaring market to push price to your profit target as fast as possible.
Great question! I utilize Tradingview for all my charting and entries. I find MT4 to be a clunky dinosar.
I trade FOREX for several reasons:
I get fewer intraday gaps than trading equities
Most brokers let you trade miniscule positions sizes, and since I trade high-frequency (1-minute/5-minute), this is important to me. In fact I just closed a trade where I risked a whopping $7.00! But I made $21.00, so I am not complaining.
I get to cheat a little by seeing what the other pairs are doing. For example, if I am analyzing the AUD/USD pair, I will look to see what the other major pairs are doing. If the USD is getting slaughtered, I am more cinfident going long AUD/USD, at least short-term.
I have the most experience trading FOREX, since I have been doing it for over 10 years now.
All the best on the charts, and have a great weekend!
To be honest, I have no idea on this theory! But if you are making consistent result with this game plan; then no issue! In my trading, I mainly follow the Price Action trading!
That’s not to say you can’t make money in sideways markets. I submit to price being fractal and one time frame in consolidation sees another trending.
