Saturday, November 29, 2014

Chaos Theory – You Can Map Any Market to Reveal the Hidden Order


One of the interesting questions at IDFA was have I solved Chaos Theory? I am not sure that needs to be solved. The problem we have is confined to our mind and trying to translate concepts into words to facilitate expressing what we think is linear thought but is not. This is the Lorenz strange attractor that governs convection in liquids. This demonstrates that our weather appears to be unpredictable, yet this unpredictability is confined within parameters which is one hall-mark of non-linearity.
Within this strange attractor, trajectories appear to jump around, taking hair-pin turns, reversing and re-reversing without warning that to the novice may seem to be without rhyme or reason. Yet this unpredictability is constantly orbiting within the overall shape of the strange attractor that is actually the universe of this system mapping out all the possible states the system can be in at any given moment. Each point on this strange attractor is the state of the entire system at one given moment.
If you are in Western basic culture, you are taught the alphabet. Children can recite the alphabet with little problem when they sing it. Teachers for years taught the alphabet by creating a song. If the police pull you over to test if you had too much to drink, one test they will conduct is to have you recite the alphabet without singing the song. We have learned the sequence of the alphabet attacking it to the sensory input of sound.
Now recite the alphabet backwards without singing. What happens? You suddenly have to think hard. Most people cannot even complete that task in a single go. Many will perhaps try to visualize the alphabet as it appeared in some printed form and read it backwards from that image in their mind if they can visualize it.
This exercise demonstrates rather important points. First, in many respects we learn certain things in a linear fashion and store that sequence in a part of our memory reserved for memorization. Many of us will play the song in our head but try to recite the sequence without the jingle, but this becomes a conscious mental exercise. This clearly involves two mental tasks – memorization and sound. To overcome that problem of trying to reverse sequence a linear memorization, we resort to a visual representation of the alphabet to read it backwards. Resorting to a visual representation reveals our capacity to process data (knowledge) in a non-linear manner that is more akin to a supercomputer dynamically linking bits of information (knowledge) that can be accessed from various sensory access paths.
It turns out that non-linear systems which are massively unpredictable from moment to moment if we try to solve the next plot purely in a linear basis. Nevertheless, non-linear systems are still bounded. Map all the possible states the system can be in, and you find a shape, which forms the strange-attractor. All the system’s many states exist within the confines of the strange-attractor’s shape. Every possible trajectory, no matter how it may appear to be unconnected to the previous is always some complex orbit within this shape – this strange-attractor.
Fractal Markets
I have not solved some mystery, but simply enabled a better observation of what appears to be chaos on the surface, yet is structured order merely hidden below. Markets are fractal – not linear progression as 99% of analysis presumes. In every field of science from medicine to physics, we build upon the learning of generations that have gone before us with the single exception economics. With every crash and crisis, they form a committee who never asks even once – Has anyone tried this solution before? Did it work?
History repeats because we are indeed within a Strange-Attractor. We have mapped the possible outcomes and observed that we are condemned to repeat the past because we are indeed within this system. Until we learn how to live within the system rather than fight it, we will remain within this chaotic appearance of non-linear system that everyone tries to manipulate on a linear basis like lowering interest rates to “stimulate” the economy, which has NEVER worked even once.
We will be adding to the system your ability to map the shape of any given market filtered through our Chaos Models to uncover the hidden order that lies beneath the appearance of chaos on the surface. Markets, like weather, are NOT random chaos. They are ordered structures that we do not see because we are still singing the alphabet song. We need to visualize the alphabet to then recite it in reverse to break the linear sequence that we learned. Look at this alphabet. Picture it in your mind (1), close your eyes, and now read it backwards from that image. Interesting mind demonstration of pattern recognition and the ability to access data by sight, sound, taste, feel, and smell. Using two inputs rather than just one to access info is non-linear dynamic thinking.
  1. If you cannot visualize it don’t jump and end it all. We all have one favored input just like we favor writing left or right handing. Some people can visualize better while others taste or smell subtle differences other do not, and then there is sound. If you can visualize, your are better at recognizing chart patterns as one example.

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