How Chaos Theory affects the Stock Market, and explains unpredictability
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- Опубліковано 29 жов 2022
- Do you know how chaos theory is relevant to financial and stock market analysis? Some technical analysis experts refer to using chaos in their analysis of stock and financial markets. But these commentators usually are not using actual chaos theory to provide meaning to financial market behavior. Chaos theory is a mathematical theory which explains how some kinds of systems behave in unpredictable ways. It's not the same thing as randomness and means something quite different. In this video we will be digging into chaos theory and discussing the similarities with financial and stock markets, and what we can learn from each.
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This is such a golden video.
Exactly what I was looking for.thsnk you
Thank you!
This will go over rmost people's head but this is a great video I'll be sharing it in my next video on my channel
Thanks JayMoney :)
Markets definitely have randomness, as the individual trades that compose them have randomness. However, that does not mean the markets are not chaotic. I think they are stochastic chaotic systems.
They are definitely random because the trades have randomness. Many of them are based on exogenous events which for all intents and purposes may as well be random (like a CEO dying, a merger being announced, a product failing, etc.). Additionally, the exact time at which a trade is made (which effects stock prices) is somewhat random, especially with fundamentals. With chaos, even seemingly negligible random innovations (such as latency from geographical location) bring randomness.
Excellent, I hope you can continue sharing knowledge through your videos.
Thanks Murilo!
Wow your video is awesome!
Thank you - that's much appreciated!!
Excellent, sir can you discuss and talk about the detection of chaotic phenomena raised in the dynamical system; many chaos detecting tools are available in the literature such as 3D phase portraits, Poincare maps, Lyuapnov exponents, Bifurcation diagram etc. Pls make a complete video on detection of chaos in dynamical system through Matlab tool.
Thanks! Hope to get around to making more videos on such subjects at some point!
Nice brother, keep it up. 🧐🍷
Thank you!
i use chaos theory with fractal analysis and it has greatly helped my trading performance
great to know - chaos theory and fractal analysis are hugely helpful for understanding how markets work and therefore how to trade in them
🤭 then you should be a billionaire by now
not yet buddy but i will message you when i hit my first Mill, cool?
@@paulnyagini
we trade live in the discord, your welcome to join if u wanna see me trade live
@@helloteacher4281 whats the discord? i would like to join :)
Major problem to assume the market is random at all. Interesting vid under the assumptions though
Thanks Jonathan - yes indeed the assumption that markets are random is behind a lot of the pricing of derivatives etc., and these can indeed go wrong. I think chaos is a nicer way of looking at the unpredictable tendencies of markets.
that was very useful and interesting, but I have a question, if we want to model the price using chaos theory we may need an equation, because the chaos theory always has a way of description for non linear dynamics like heat equation or navier-stroke equation. Even if want to use neural operators, the data without an equation may not be sufficient. What do you suggest for this problem?
I think that using an equation to describe price movements is always going to be compromised in one way or another - it depends on what you are hoping to achieve by doing so.
What is 'short term, medium and long term' in time?
That's a good point that it's a bit subjective and depends on an individual and what they consider these timeframes to be. My thinking in this video would be that short term is over a few days, medium is months, and long is years.
All is number.
1:15, I have a correction here, Markets are random, if they are efficient.
Perfectly correct comment - theoretically - I think though real markets show temporal structure that randomness doesn't, though it would be pretty cool if you could use markets as a genuine random number generator! :) Thanks for your great comment!
I disagree. However, chaos theory does occur in smaller time frames (seconds, 1 min, or anything less than 4 hour timeframes)
The markets do have a similar behavior where it bounces in such a way as the video shows and forms wave patterns as such.
Chaos theory is prevalent within lesser time frames in the markets.
This is one of the reasons why majority of Day Traders lose money.
However, when you step back further out you would be able to see the full structure of the stock ticker or currencies.
These structures form very similar patterns. These big scale patterns are composed of smaller patterns of it's similar strength formations. Each of the scales are considered a cycle.
The markets are composed of cycles within cycles within cycles within cycles or strength patterns, within strength patterns, within strength patterns, etc.
Most people do not see the similarities because they look at the prices and how the prices form.
However, to see these almost exact patterns you need to look at what causes them to move.
The underlying power of the markets is strength. Strength is the combined power of all trades happening at a certain point in time. Strength is the GOD of the markets.
By analyzing the flow of strength you can see the patterns along with the candles they form.
And by analyzing in which area of the flow you are in you can determine which area of the pattern you are currently in.
By doing so, you can see when they would spike up or collapse. Furthermore, it allows you to foresee almost everything in the markets.
Thanks for the great comment. The degree and nature of unpredictability does depend on the timescale in my view - e.g. ultimately economic factors will determine the underlying value of a stock. So it's a really interesting question as to what plays out at different time scales.
@@fractalmanhattan To see how the markets work you will need to look at market tickers that are less disrupted / mutated / distorted.
From my experience, the housing market, forex currency and gold are good examples. The main reason they are good examples is because they are so big that retail has little to no power to cause disruptions in the pre-determined flow of strength. Therefore, the strength pattern formations become obvious once you begin to recognize them.
Once you start recognizing them, you will see them all over the place. Stocks are harder. Once you see them happen over and over again, you will begin to doubt if the markets are actually moving based on economic factors or if the movements are already set in time and the economic factors / news happen based on where the pattern is heading towards. This is like witnessing what came first.. the egg or the chicken (the economic decisions (fed decisions or the pattern - as if the movements are already set in the future and news/feds are just simply noise). I have many examples of this. But to show you a simple proof click on the link to my facebook acct. I posted a few of them on there. The link below is a demonstration of the markets in it's simplest form (it is also a result of simple visualization of fractal geometry - golden ratio). However, it takes time and a good chunk of capital to take advantage of them. Even just one ticker could make you a multibillionaire.
facebook.com/photo/?fbid=10160932642045943&set=a.10150266179370943
Butterfly effect is compouned by 100,000,000 simultaneous butterfly effects that each cancel eachother out. True butterfly effect can only occur when there's just one butterfly if that makes sense (this is how I imagine it)
Thanks and yeah - I think that is a pretty accurate observation - in the real world there's a huge number of variables, and this adds to the chaos and complexity!! I should get around to talking about high-dimensional chaos at some point :). Thanks again.
Dr Alan H. Andrews
Well, I look at a forex line chart, and a pseudorandomly generated line chart, and they both look the bloody same. It's random... chaotic... unpredictable. It's all the same thing. They all have one thing in common: You cannot predict the future.
If it's random, it's unpredictable. If it's unpredictable, it's random. It's not rocket science.
How can human behavior be mathematically predicted?
It can't literally be modelled like this, but some kind of framework based on behavioral economics, or agent-based models, often gets used to understand the human component. I think the sort of simpler chaotic system talked about here would only be relevant for modelling the interaction of the stock price with the long-term business performance of a stock - so the longer-time scale stuff. The "spiky" fluctuations that occur over shorter timescales would be better modelled with human behavior models, where the behavior would be more irrational - i.e. driven by following the crowd, greed during an upward move and fear when the price slips again. Some thoughts anyway.
I only know part of the answer, simply because this is a mathematical universe and numbers write a complex story with our everyday lives
Our everyday lives can be modeled with fractals.
By having trillion dollars you can predict it 😅
You’ll have to study chaos theory