vito 7 schreef:
As a trader, you must learn about chaos, what it is and how to deal with it. Why? Because, in the opinion of many, the markets are non-linear, dynamic and chaotic. Many of the legendary trend traders have focused heavily on modeling around chaos theory. To them and others, the markets are non-linear, highly random, but with a trend. They work with strong mathematical and statistical models involving skew, kurtosis and tails to exploit the chaotic nature of the markets. When they win, they win big. They can also lose big. There is risk in chaos, just as there is reward.
Chaos theory requires non-linear thinking, and eludes many who elect to live and think in a linear world. Fractals and fractal analysis play an important role in chaos theory. The work of the 80 plus year old mathematician, Benoit Mandelbrot, ( of Mandelbrot Fractal fame) has been applied to the financial markets in his controversial book entitled "The (Mis) Behavior of Markets", wherein he uses fractals to correlate commodity prices, income distribution, and the functioning of the cardiovascular system.
Interestingly, particularly in light of the present catastrophe bought on by weather, much work on chaos theory was done by Edward Lorenz, a meteorologist. His work is beyond the scope of this article, but the end result has come to be known as the "butterfly effect" :
The flapping of a single butterfly's wing today produces a tiny change in the state of the atmosphere. Over a period of time, what the atmosphere actually does diverges from what it should have done. So, in a month's time, a tornado that would have devastated the Indonesian coast doesn't happen. Or maybe one that wasn't going to happen does ( excerpted from : Does God Play Dice? The Mathematics of Chaos by Ian Stewart)
For those of you who wish to go further into this, here is a link to start:
www.cmp.caltech.edu/~mcc/chaos_new/Lo...The highly controversial and provocative work of the mathematician and exotic options trader Nassim Nicholas Taleb ( "Fooled by Randomness"), revolves, in part, around the theory of The Black Swan. His basic thesis is that, since we have not ever seen a black swan, we think that all swans are white. Black swans are so-called "outliers," or events that do not follow predictable rules. Taleb posits that we get guidance for the future based on our experience from the past, somewhat like a driver looking into a rear view mirror who runs off the road or into a brick wall.
One of his basic theses is that we don't learn that we don't learn, and that events that really matter do not follow any predictable rules.
MVG Vito