Statistics & Chaos Theory for Traders - Online resources & books

[RichKid]

I've been coming across more and more references to chaos theory and statistical analysis of various aspects of trading. We should learn more about these important topics. Apparently HG Wells observed:

"If we want to have an educated citizenship in a modern technological society, we need to teach them three things: reading, writing, and statistical thinking."

The experts on ASF often refer to various terms which scare the living daylights out of me from time to time (I am sorry to say this, but Wayne is the main culprit...), various terms like Black Swan, fat tails and Kurtosis suggest to the uninitiated that he is referring to either a person who is unloved or one with an exotic disease (probably unloved as well).

The following references have been helpful to me. Are there others that people have had first hand experience of that may be helfpul to traders and those studying financial markets? Please share, as I have, to get the ball rolling.

Most uni or tafe students studying maths, business or science would have some proficiency in this area (although many say the subject sux bigtime!).

- Trend Following by Covel (2005 edition- latest ed. The HG Wells quote is from Chapter 8 ).

- http://www.fractalfinance.com/index.html

- http://metalinks.metaculture.net/science/fractal/

Thanks in advance to everyone!

 

[It's Snake Pliskin]

Re: Statistics & Chaos Theory for Traders- Online resources & books

I've been coming across more and more references to chaos theory and statistical analysis of various aspects of trading. We should learn more about these important topics. Apparently HG Wells observed:

"If we want to have an educated citizenship in a modern technological society, we need to teach them three things: reading, writing, and statistical thinking."

The experts on ASF often refer to various terms which scare the living daylights out of me from time to time (I am sorry to say this, but Wayne is the main culprit...), various terms like Black Swan, fat tails and Kurtosis suggest to the uninitiated that he is referring to either a person who is unloved or one with an exotic disease (probably unloved as well).

The following references have been helpful to me. Are there others that people have had first hand experience of that may be helfpul to traders and those studying financial markets? Please share, as I have, to get the ball rolling.

Most uni or tafe students studying maths, business or science would have some proficiency in this area (although many say the subject sux bigtime!).

- Trend Following by Covel (2005 edition- latest ed. The HG Wells quote is from Chapter 8 ).

- http://www.fractalfinance.com/index.html

- http://metalinks.metaculture.net/science/fractal/

Thanks in advance to everyone!

Thanks for the interesting post RK!

I shall contribute later.

 

[wayneL]

Re: Statistics & Chaos Theory for Traders- Online resources & books

I've been coming across more and more references to chaos theory and statistical analysis of various aspects of trading. We should learn more about these important topics. Apparently HG Wells observed:

"If we want to have an educated citizenship in a modern technological society, we need to teach them three things: reading, writing, and statistical thinking."

The experts on ASF often refer to various terms which scare the living daylights out of me from time to time (I am sorry to say this, but Wayne is the main culprit...), various terms like Black Swan, fat tails and Kurtosis suggest to the uninitiated that he is referring to either a person who is unloved or one with an exotic disease (probably unloved as well).

The following references have been helpful to me. Are there others that people have had first hand experience of that may be helfpul to traders and those studying financial markets? Please share, as I have, to get the ball rolling.

Most uni or tafe students studying maths, business or science would have some proficiency in this area (although many say the subject sux bigtime!).

- Trend Following by Covel (2005 edition- latest ed. The HG Wells quote is from Chapter 8 ).

- http://www.fractalfinance.com/index.html

- http://metalinks.metaculture.net/science/fractal/

Thanks in advance to everyone!

hey RK

I missed this post

"but Wayne is the main culprit."

I forget not all people are familier with some of these terms.

Thanks for the links

 

[RichKid]

Re: Statistics & Chaos Theory for Traders- Online resources & books

Hi Snake, Drac,

Glad it's of some interest guys, this is certainly helping me avoid thinking like I used to (viz a mug punter), with that will come some ability to sift through the tonnes of garbage I read with greater efficiency. It'll probably take me years to fully integrate the stuff into my life. www.edge.org has lots of great info too (referred to in Covel), I think you'll like the site Wayne if you haven't come across it already.

It's thanks to the fact that you mentioned those terms that I've made the effort to read up on it, I know you don't just 'name drop' for the sake of attention so I figured it'll be worth some follow up work.

(That book I mention by Covel is great btw, it has a great chart of a trend following, diversified trading system equity curve depicted as a payoff diagram for an ITM long call).

 

[It's Snake Pliskin]

Re: Statistics & Chaos Theory for Traders- Online resources & books

Wel my contributions to this thread will be limited due to my lack of education in this area, but here is some stuff to go over:

First a link to a video of Benoit B. Mandelbrot who theorised "the fractal misbehaviour of markets" and wrote a book about it. His accent is very difficult and I am yet to finish looking at it.
http://www.researchchannel.org/prog/displayseries.asp?collid=882

Has any one read his book?
http://bookweb.kinokuniya.co.jp/guest/cgi-bin/booksea.cgi?ISBN=0465043550

Some reviews:
http://search.barnesandnoble.com/booksearch/isbninquiry.asp?z=y&pwb=1&ean=9780465043552

I am interested in how fractals relate to Risk and Return.

 

[RichKid]

Re: Statistics & Chaos Theory for Traders- Online resources & books

Wel my contributions to this thread will be limited due to my lack of education in this area, but here is some stuff to go over:

First a link to a video of Benoit B. Mandelbrot who theorised "the fractal misbehaviour of markets" and wrote a book about it. His accent is very difficult and I am yet to finish looking at it.
http://www.researchchannel.org/prog/displayseries.asp?collid=882

Has any one read his book?
http://bookweb.kinokuniya.co.jp/guest/cgi-bin/booksea.cgi?ISBN=0465043550

Some reviews:
http://search.barnesandnoble.com/booksearch/isbninquiry.asp?z=y&pwb=1&ean=9780465043552

I am interested in how fractals relate to Risk and Return.

Thanks very much snake, will have a look through it all.

In TA we believe patterns repeat themselves, in Elliott Wave we see large waves and smaller versions of those waves within the larger waves- the free tutes on the Elliott Wave International site has a dicussion of fractals in relation to EW theory, see the various EW threads on ASF. We then use EW theory with risk management to trade those fractals/waves/patterns. I'm sure there are other ways too relating to cycles but nothing comes to mind at present.

Remember the statistical side of this thread too, like the statistical studies Wayne does on options volatility. We often combine a number of things to come up with a method so fractals may just be an aspect of it all.

 

[It's Snake Pliskin]

Re: Statistics & Chaos Theory for Traders- Online resources & books

No worries Richkid,

What is your take on this extract?

The stock markets are said to be nonlinear, dynamic systems. Chaos theory is the mathematics of studying such nonlinear, dynamic systems. Chaoticians have determined that the market prices are highly random, but with a trend. The stock market is accepted as a self-similar system in the sense that the individual parts are related to the whole. Another self-similar system in the area of mathematics are fractals. Could the stock market be associated with a fractal? Why not? In the market price action, if one looks at the market monthly, weekly, daily, and intra day bar charts, the structure has a similar appearance. However, just like a fractal, the stock market has sensitive dependence on initial conditions. This factor is what makes dynamic market systems so difficult to predict. Because we cannot accurately describe the current situation with the detail necessary, we cannot accurately predict the state of the system at a future time. Stock market success can be predicted by chaoticians. Traders can succeed trading from daily or weekly charts if they follow the trends. A system can be random in the short-term and deterministic in the long term.

An interesting extract from the following link by Rich Kid:

http://www.fractalfinance.com/chaostheory.html

Would anyone like to make this a little simpler as they see it? I understand it but feel discussion on it would be good.

Thanks
Snake