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One of the problems with Chaos theory has been in applying it to trading. TA
tools already exist in most trading software to apply the theory under another
name.
Gilbert Raff has a chapter in his book "Trading the Regression Channel". The
chapter is titled "The Regression Channel As A Chaotic Attractor". Here are
two paragraphs from that chapter:
"Let's return to the example of the cigarette. Imagine a cigarette holder
standing straight up in a perfectly still room. Theory teaches us there is
simply no way to predict the coils and loops the smoke will make as it rises
from the cigarette. However, if we were to position a TV camera on the
ceiling, and film ten thousand cigarettes in a row, while the smoke would
never make the same pattern twice, it would also never travel beyond a thin,
conical boundary as it rose in the air. In the new language of Chaos Theory,
this reliable boundary enclosing a completely unpredictable pattern is called
a Chaotic Attractor."
"Regression Channels, with their puzzling property of containing price for
years, are like the boundary constraining the smoke. The best theory I can
offer for the behavior of price near a Regression Channel Line is that it is
tracing out a Chaotic Attractor for the security it is describing."
Note that price tends to accelerate towards the "attractors". The attached
chart, here and on the next post, show that the attractors based on historical
data extend into the future and still maintain an influence on prices. So, if
you are looking for an equation to find chaos attractors, look at the formula
for regression channel lines.
BobR
Attachment Converted: "c:\eudora\attach\CHAOS.gif"
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