The markets are Chaos...and Order

[timestwo]

Interesting posts Sir O, so what you've effectively said is that based on news/current trends and what is happening with the economy, we can place these factors onto the 'clock' and find how what 'time' we are at as such? The attachments we're a bit small/hard to read.

[Hal2000]

I take no offense- did you see how I avoided the question? Let me ask you one. Given that I have said that the larger the data set the more accurate youcan become, do you think equities has the required characteristics I am looking for?

Given that there were only eight trades a week ( and there would be plenty more)That level of return just tells me that it's relevant.

Cheers

Sir o

All very good but I see the markets as a place where vegetables grow.
I like to grow vegetables.
Depending on what’s in season I generally plant tomatoes in late spring and beet in Autumn.
Some vegetables grow all year round.
I am not a trader in vegetables, I just like to watch them grow.
I use no math to grow vegetables.
I grew a very nice patch of RRL vegetables two years ago, ended up with much more than I expected.
I kept the harvest all to myself of course.
My method is to check to see if there is a qualified gardener, soil is good, and there’s plenty of sun without too much wind, and no bugs, and well watered.
Currently got a good crop of golden beet growing right now, just seedlings but looking healthy, can’t expect to push things faster than mother nature will permit.
Am I missing out on something here?

[RandR]

I have been reading material that discusses the economic theory of equilibirium. Lots of discussion surrounds Walrus model and assertion that any market operating in a disequilibrium will in the long term not affect the ability to find equilibrium in another. To my mind this is utter hogwash, I cant see a point in any market in todays world where one can say ... equilibrium exists. Also touching on differential equations which is taking my brain some effort to get around, but then goes through E.N Lorenz model of turbulent flow which is easier for my brain to practically make use (and sense) of. Looking at his system actually makes a lot of sense to me and gives a good example of the impact of what can happen when just the tiniest divergence from a point of 'equilibrium' can have upon the model even with only a few variables.

Yet there is still structure. Cycles can clearly be seen. The key seems to be that an equalibrium is NEVER found. Another example given of this is Marx theory and Goodwins model of cyclical growth, demonstrating the relationship between employment and wages. The key is an equalibrium is never found.

My first thoughts upon thinking about this are ... can these patterns and any possible relationship/cycle be identified within the price points of commodities. ???

[MrBurns]

I think the markets are in a malaise at present and I cant see that changing except to accommodate a crash.

It's now boring, there is no way forward for growth, it's just a wait and see where the debt finally takes us.

[CanOz]

I think the markets are in a malaise at present and I cant see that changing except to accommodate a crash.

It's now boring, there is no way forward for growth, it's just a wait and see where the debt finally takes us.

Too right mr.b, it's a bloody mess and will be for years I imagine! Those bloody banker wankers have a lot to answer for. Gone are the days when you park your super safe in a cozy fund and watch it grow....now it's the great search for yield.

CanOz

[timeless]

Introduction
A good financial adviser might also learn some probability and how to apply it, standard deviation, variance, that sort of thing. Ultimately however this kind of math hasn’t progressed beyond Newtonian math, which is fundamentally flawed when dealing with chaos.

....

Just what the hell is Newtonian math?
Sir Isaac Newton’s development of calculus and the laws of classical mechanics began in the 17th century, where it became accepted dogma. It gave scientists and mathematicians tools to determine the dynamics of bodies by simple equations. How great was that!

Hi Sir O
This article touches an interesting subject and I like the way you look at the Market and related phenomena, but I do not think you have some basic facts right.

There is no such thing like Newtonian math as opposed to Newtonian mechanics, Newtonian fluids etc.
You may say Newtonian math if you refer to his peculiar notation he used in his time. But Newton's mathematical concepts and proofs are universal infallible and timeless (!). The notation and terminology only changed since then and obviously new unexplored branches of maths have evolved.

In contrast Newtonian Mechanics is a model of physical world with limited scope, but the most successful one so far since it brought physics from nothingness to almost what we have today.
Newtonian Mechanics has later been complemented or generalised by other models such as Quantum Theory or General Relativity. There is noting flawed in Newtonian Mechanics. It is just a model that is incomplete.

Chaos from the mathematical stand point uses that "Newtonian math" in new context seamlessly, but exploring and expanding the knowledge and approach to a particular class of dynamic equations.

There is no fallacy in "Newtonian Maths" in economics or trading application, but there are simplistic mathematical models being applied to an extremely complicated beast which is the Marker.

"Newtonian maths" does not limit anybody to simple equations. You can make them arbitrary complicated. Whether you can solve them is another matter...

Cheers

[FlyingFox]

What a great thread. It is a shame it is not continuing. I was thinking along these lines when I started a thread in the long term investing forum. I wished I had seen this before that.

Firstly Sir O, I although I have only briefly read all your posts on this thread, I get the gist of what you are trying to say. However I don't think you have the right terminology. While fractals and chaos are related they are not the same.

Similarly I don't think the market is chaotic, not at all time scales anyway. There are common macro economic principles and trends that drive them at the macro level anyway. It maybe at the daily and hourly levels but like you said the more information you have the more accurately you can model these.

More specifically the markets are highly nonlinear functions of many variables with many unknown variables and possibly many random variables (many of these variables are people!!!!). Does it make it chaotic? perhaps... but it is not deterministic to start with. However like many on the forums who guess why a stock went up by 10% on a particular day, we don't know what the person who bought the stock knows. These vague and unknown variables can be modelled with probability and/or fuzzy logic.

Another feature that is different is that the market is driven and damped. Perhaps under-damped which provides boom and bust cycles but damped non the less (we are all greedy creatures after all). Therefore generally, things don't oscillate wildly or shoot off into the distance.

You also mentioned detecting different curves. I think what you might find more useful is work related to basis function decomposition e.g Fourier series, principle component analysis, independent component analysis, wavelet decompositions etc. These are however data analysis techniques and you will need more modelling on top.

I do hope the tread continues as it is quite interesting.

[Craton]

Sir O,

Your first two posts and indeed this whole thread I've read with fascination.

As one barely schooled and unwise in the ways of *academia* I found the reading relatively easy to follow and more importantly, I understand what you are saying.

Would have liked to have read in full how you reached your eureka moment so;

+1 for continuing on in the style of those first OP's.

Great read, thanks.

[radarz]

Introduction
the peanut gallery and anyone that wants to contribute after each part and really hope to stimulate some interesting discussion.

It was once said to me that "the more things change, the more they remain the same".
At the lowest common denominator, it's all about selling something to someone for more than it's worth, or, buying something for less than it's worth. Understand this, I understand that it is not chaotic, but, rather well organised.

While you may be able to model financial systems using a system other than a "Newtonian" system, ultimately (and without very much knowledge or authority on the subject) I feel that the problem you will encounter will be that of quantum vs classical.