# The markets are Chaos...and Order



## Sir Osisofliver

*Introduction*
I wanted to write something for the forum – actually I wanted to use the forum members for a sounding board to see where I need to tighten up the text or explain things better before I use it somewhere else. It might appear as an article somewhere, or if I can finagle a sabbatical I might write a book with it.  

You’ll note this isn’t in the beginner’s section, but I don’t mind beginners looking at it and commenting. I’m hoping that some of the experienced characters around here who get what I am talking about might like to challenge, add to or otherwise comment. I’m not sure how much time I will have to answer questions in this thread but will do my best. What I’m hoping to share with you is an extended epiphany that I had a few years ago in relation to the market, which has governed my investment styles since that time.

A word of warning however… this is going to get complex pretty damn quick before it gets easier and before you get to the piece I write on application I’d like you to understand the concepts I’ve spoken about around economic cycles. That information will be a useful starting point before I get to the really meaty stuff.  If you haven’t read my newbie thread and the section on economic cycles you can find it in my signature.

Finally I will be breaking this into several parts, because the amount of time I can devote to this is not exhaustive and will write it a piece at a time, when I can – expect long delays. I’ll be pausing for flames, na-uhs, grammer nazis (see what I did there  ), the peanut gallery and anyone that wants to contribute after each part and really hope to stimulate some interesting discussion. My thanks to Joe who agreed to put a sticky on this as well.

*The Markets are Chaotic – Part I*
The older I get the more I realize exactly how chaotic the financial markets are, not because we are currently experiencing some volatility in world markets; more because of what kind of behaviour it exhibits both in macro and aggregate scales as well as micro and individual scales. Behaviour that is unmistakably *chaotic*, if you know what to look for. The fact that you can see it across both large and small applications is one of the signs that indeed the market corresponds to chaotic principles. Hopefully you will join me on this journey of discovery and by the time we get to the end of this, you’ll know three important things, what chaos means for the market, why I applied it to the way I invest personally and how you can apply it as well. 

Chaos doesn’t mean what you might think. When I talk to a lot of my peers in the financial services industry, their eye’s glaze over because chaos is a fundamentally different field of mathematics than what they learnt to become financial planners or stockbrokers or accountants or analysts or whatever. When you become a financial adviser you learn to read boring maths really well…balance sheets, profit and loss, cash flow statements, things like that. I’m not saying that you don’t need to know those things, because it’s important for every financial adviser to understand the drivers and influencers behind a good business as opposed to bad one. 

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. It’s important to still know these things though because good fundamental analysis ultimately operates inside of a framework that is governed by chaos. I know that might be a challenging statement for some, but economics doesn’t exist independently of chaos. It’s not “special” and magically separate; chaos (and the corresponding order that emerges from it) permeates *everything*.

The kind of math associated with fundamental analysis however does tend to make the mind think in terms of duality. Profit and loss, assets and liabilities, top-down, bottom-up, things like this tend to train the mind that the market is very two dimensional in nature. Most advisers unconsciously realise that there are multiple dimensions, our relationships to markets independent of our own for example, with varying degrees of correlation, but then always seem to flounder and for some reason say it’s “just economics”, and economics my friends is very firmly rooted in *Newtonian* math. 

*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! If you only knew what the simple equation was that governed a particular action, if you knew the starting position or initial set of circumstances, you could *predict the future*. Newtonian math was massively useful in all manner of mechanical applications. This is the math that spawned the industrial revolution. With this math you could design a machine and know that it would endlessly replicate the same action in a repeatable and predictable way. 

Newtonian math evolved the concept of Determinism, namely the belief that the past completely determines the future. Problems arose for the Determinists towards the end of the 1800’s when some very difficult equations (non-linear differentials) proved impossible to solve with Newtonian Math and a whole new branch of mathematics emerged, which would ultimately become what we know of today as Chaos.

Can you see where I am going with this? As investors into the financial markets we attempt to *predict the future* every day, based on some simple equations that try and identify the dynamics of the market. These equations might be fundamentally orientated; that X share, after subjecting it to a myriad of financial modelling has an intrinsic value of $ and is therefore cheap or expensive. We then take a position based on our calculated intrinsic value and attempt to *predict the future*. If we are technical analysts, we use things like Standard Deviation, Moving Averages, Oscillators and Volume and attempt to use the past price and volume data to *predict the future*. 

We might do this with varying degrees of success, depending upon how much money we have, what the equations we use are; what risk minimisation techniques we use, what positional sizing we employ and how carefully we conduct our money management. Every so often however, chaos comes along and kicks our carefully constructed sandcastle of equations and strategies in our face, and we are left trying to pick up the pieces and wonder what we did wrong, why didn’t it work? It’s as if the machine threw a cog and what was once almost certain, becomes undeniably uncertain, because of one of the fundamental principles behind chaos.

We go searching for more data, we seek to validate our strategies with extensive testing and modelling and say things like "It's not statistically relevent until you've done it a few thousand times and come up with a positive result". We argue, we sometimes share what works with others, and keep closely guarded secrets close to our chests.

Good traders and investors learn to shrug chaos off, they say things like “It doesn’t matter if you are wrong, just how long you stay wrong for.” Or “The market can stay irrational longer than you can stay solvent”. If they have protected their investments in the armour of money management, positional sizing models, trailing stop losses and the like these knights can take a hit and keep on moving through the chaos of constant battle in the quest for alpha returns. 

These traders simply deal with chaos by acknowledging that it exists, that they cannot do anything about it beyond taking it on the armoured chin and moving on to the next opportunity to test their mettle in battle. What if I told you however that there are ways to make chaos work *for you* rather than *against you*. That chaos has principles and that if you are aware of what these principles are and how you can apply them to your personal trading you can use them to add another layer of armour. 

Part II – Principles of chaos – coming soon


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## Sir Osisofliver

What two hundred views and no comments?  You guys and girls aren't trying. I had more planned for this evening but responded to a newbie private message...so this is all you get for now.

*Principles of Chaos – Part I*
If you look back at the previous post, Newtonian math gave rise to Determinism. The ability to perfectly predict the events in the future, based on prior conditions. If you understand the math behind leverage, know the weight of the object that you need to move, you can work out with certainty the amount of force that will be required to shift the weight. You can determine the cause (the lever) and the effect (moving the object). You can repeat the experiment a thousand times and still come up with the same amount of force required every time.  This is the lure of Determinism, cause and effect are clearly visible.

Chaos at it’s essence however is *indeterminism*. Indeterminism is the concept that certain events are not caused deterministically by prior events. This is like saying that the amount of force required to move the object will vary, so you can see why Determinism was accepted dogma for centuries. Notice the wording however, *certain events *are not caused deterministically. 

*What are these certain events?*
In short, chaos embodies three important principles:

•	extreme sensitivity to initial conditions
•	cause and effect are not proportional (!)
•	nonlinearity

Extreme sensitivity to initial conditions in it’s simplest sense is the Butterfly effect coined by Edward Lorenz. It was he that coined the phrase, “If a butterfly flaps it’s wings in South America will it affect the weather in Central Park?”.  Lorenz was a Meteorologist and Mathematician who set out to construct a mathematical model of weather. He was attempting to build a set of differential equations that represented changes in temperature, pressure, wind velocity etc. He ended up with a model containing a set of 12 differential equations. 

In 1961, Lorenz wanted to re-examine a set of data coming from his model. Instead of restarting the entire data set, he decided to save time and restart the set from somewhere in the middle. Using data printouts, he input the conditions at some point of the previous set, and re-started the model calculation. What he found was very unusual and unexpected. 

The data from the second set should have exactly matched the data from the first set. The conditions were the same, the equations (which were deterministic) were the same for both runs. While they matched at first, the data eventually began to diverge dramatically ”” the second set losing all resemblance to the first within a few "model" months. Initially he thought the problem was his equipment but he eventually discovered what caused the divergence between the two sets of data. In the second set of calculations he’d only entered 3 digits, whilst the computer memory contained six digits.  This tiny alteration exhibited the phenomenon known as sensitive dependence on initial conditions, *the first principle*.  

Why then did the results vary so much? A small change in a deterministic model should have resulted in a small change to the outcome. Lorenz’s model exhibited wildly different outcomes that were not proportional to the tiny change,* the second principle*. The answer is also that the equations used in the model were nonlinear equations, *the third principle*.

*Ok now that we’ve had a history lesson what does that mean for the market?*We’ve identified the three principles behind chaotic systems. Extreme sensitivity, non-proportional cause and effect and non-linearity. Lets start with the extreme sensitivity and initial conditions.... NEXT POST


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## tech/a

Been too busy chatting to Nicholas Taleb.
He's helping me decipher the content in the thread.


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## robusta

Very interesting thread Sir Osisofliver.

From my limited understanding it would be very difficult to use this theory as a predictive / market timing tool. Would it be better to use the portfolio management techniques you refered to in your first post to take advantage of chaos?

Is you definition is chaos any movement away from the underlying value of the financial instrument, boom or bust?


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## skc

My view is that market is not deterministic in the Newtonian sense, but probably more fuzzy logic than chaos.

Will let you have the stage and finish your posts...


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## So_Cynical

I turned off after 2 paragraphs....i like to keep the simple, simple.


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## barney

Sir Osisofliver said:


> *
> Every so often however, chaos comes along and kicks our carefully constructed sandcastle of equations and strategies in our face, and we are left trying to pick up the pieces and wonder what we did wrong, why didn’t it work? It’s as if the machine threw a cog and what was once almost certain, becomes undeniably uncertain, because of one of the fundamental principles behind chaos.
> 
> *



*

I have this "sand in my face" problem every night trying to trade forex





Sir Osisofliver said:





What if I told you however that there are ways to make chaos work for you rather than against you. That chaos has principles and that if you are aware of what these principles are and how you can apply them to your personal trading you can use them to add another layer of armour. 



Click to expand...




You have my undivided attention 

Only just noticed the thread Sir O,  Looking forward to the updates.*


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## Sir Osisofliver

tech/a said:


> Been too busy chatting to Nicholas Taleb.
> He's helping me decipher the content in the thread.




So that's one interested but confused?



robusta said:


> Very interesting thread Sir Osisofliver.
> 
> From my limited understanding it would be very difficult to use this theory as a predictive / market timing tool. Would it be better to use the portfolio management techniques you refered to in your first post to take advantage of chaos?
> 
> Is you definition is chaos any movement away from the underlying value of the financial instrument, boom or bust?




One interested tell me how to apply it *now*.  Robusta we're getting there.



skc said:


> My view is that market is not deterministic in the Newtonian sense, but probably more fuzzy logic than chaos.
> 
> Will let you have the stage and finish your posts...




One opposing theory !YAY! from SKC my new favourite poster, (the piece from last night was going to include some information on Probabilistic Causation - I might be able to get to that today).



So_Cynical said:


> I turned off after 2 paragraphs....i like to keep the simple, simple.




One switch off - Thanks for the feedback Cynical - may I ask you to expand on why? Too wordy, to technical, too much history?



barney said:


> I have this "sand in my face" problem every night trying to trade forex
> 
> You have my undivided attention
> 
> Only just noticed the thread Sir O,  Looking forward to the updates.




One interested.

Thank-you all for the feedback, I'll keep plugging away.

Cheers

Sir O


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## howmanyru

Dude, fear and greed drive the market, don't over complicate it


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## Junior

Sir O I'm reading with keen interest.  

I'm expecting that you'll unveil the holy grail of wealth creation, a new revelation which will unlock the mystery of market behaviour and will inspire a new school of thought for the investment community.

Seriously though, keep it up, I'm learning from and enjoying what you're posting here.


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## Sir Osisofliver

howmanyru said:


> Dude, fear and greed drive the market, don't over complicate it




Cool...can you tell me how they drive the market? (In a way that I can make money from it).



Junior said:


> Sir O I'm reading with keen interest.
> 
> I'm expecting that you'll unveil the holy grail of wealth creation, a new revelation which will unlock the mystery of market behaviour and will inspire a new school of thought for the investment community.
> 
> Seriously though, keep it up, I'm learning from and enjoying what you're posting here.




LOl @ Junior - I'm not aiming for a Nobel Prize for economics here Junior. I *am* hoping to engage and stimulate some interesting debate and discussion.

Cheers 
Sir O


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## motorway

> CHAOS IS SEASONAL
> Certain events appear to occur in an irregular sequence of
> nonrepeating patterns. Such a picture, which corresponds to
> the scientific notion of chaos, may seem to be useless in preparing
> for the future. But chaos in the stock market, as in
> business and many other areas, appears to be seasonal.
> 
> *In particular, chaos is associated with periods of stagnation.*
> 
> Once a trend enters a high-growth season, fluctuations become
> less significant. Moreover, rapid-change seasons
> alternate with stagnating seasons, implying that chaos eventually
> leads to order, and vice versa.
> 
> There is symmetry in this swing
> from chaos to order and back, which can be utilized in making
> investment decisions.






> In scientific terminology, chaos is the name given to a set
> of on-going fluctuations that never reproduce in an identical
> manner. It was first observed mathematically when growth
> functions were put in a discrete form.
> 
> Because populations
> are made up of discrete entities, a continuous mathematical
> function offers only an approximate model for the real situation.
> Putting mathematics in a discrete form also became
> necessary by the need to use computers, which treat information
> in bits and pieces, rather than as continuous variables.
> 
> Benoit Mandelbrot and other chaos scientists have argued
> that equilibrium and orderly growth are only the tip of the
> iceberg, whereas the richness of our world comes from the
> noisy, apparently random behavior encountered in the unpredictable
> patterns of currency movements and market reactions.
> 
> In his best-selling book Chaos, James Gleick explains
> that *chaos fans are not interested in steady-growth  processes. They concentrate on the fluctuations that become
> prominent whenever the growth rate drops to zero.* Through
> fractal structures (popularized via beautiful computergenerated
> pictures),* chaos scientists have succeeded in
> detecting some order in randomness. They want to believe
> that their theory contains all one needs to know about
> markets.
> 
> But practicing professionals remain skeptical.
> Despite high expectations, chaos studies have proven of
> small added value in predicting the future. I heard
> Mandelbrot himself admit in public that having succeeded in
> modeling the chaotic patterns seen in stock-market indices
> did not bring him any closer to becoming rich.
> 
> The approach I adopt in this book is to maintain maximum
> generality by allowing both equilibrium and chaotic situations.
> 
> 
> *The big picture that emerges from this method is at
> times dominated by orderly S-shaped growth steps and well defined
> roles for the competitors, and at other times by erratic
> large-amplitude fluctuations characteristic of chaos.*





CHAOTIC FLUCTUATIONS characterize the BEGINNINGS and ENDS for VERY GOOD REASONS and  are a TELL TALE SIGN==>

"A naive but illuminating model for the alternation between
order and chaos is the image of an elderly person who with a
shaking hand tries to draw an S-shaped curve.

 While drawing the flat early part of the curve, his trembling produces visible
jagged peaks and troughs, but during the sharp upward move
the fluctuations from the trembling become masked by the
well-pronounced trend. For me, as an experimental physicist,
the strongest evidence comes from pictures of nonmanipulated
historical data"   Theodore Modis, Ph.D.


Important is HOW to MEASURE and WHAT TO MEASURE

Measure wrong and it can all looks like Chaos , When that is really but a small part of what matters.

Quotes above are from Theodore Modis  ==> http://www.growth-dynamics.com/

Also good is http://www.olsen.ch/key_insights/four_market_properties/

etc

esp good on Intrinsic time  and it importance 







> Intrinsic time is not physical time: in physical time, price changes are computed from one day to the next or one hour to the next. In intrinsic time, we compute price changes from one change of direction of the price to next directional change.
> 
> A direction change occurs, as soon as the price has reverted from its previous extreme by a specific threshold, say 1% or 0.1%. Intrinsic time is event based (the event is the direction change). Intrinsic time is effective, because it focuses on periods of action and discards phases when nothing happens in markets.
> 
> When important news events occur, such as at the time of the release of US Non Farm Payrolls, the price action is frequently erratic. The five minutes after Non Farm Payroll numbers are not normal five minutes, but can be very eventful and need to be a analyzed as such. If we use intrinsic time, we discover distinct statistical properties that make markets predictable in statistical terms.




These Three Videos
http://enantiodromian.blogspot.com/2011/02/benoit-mandelbrot-and-richard-olsen.html

Motorway


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## tech/a

Sir Osisofliver said:


> So that's one interested but confused?
> 
> Sir O




No not at all.

After years of trading.
This is my strategy and answer to trading the chaos shown in markets.
We attempt to trade
With a trend
Or
Reversion to a mean
Or 
Catching an outlier

We can't tell when a trend will occur or how long it will continue let alone it's course.( erratic, or orderly.
What is the mean?
What are the signs of an outlier possibly occurring

We don't know definitively
All we can do is place ourselves in front of setups we believe to be precursors to any of the above.
All the while putting in place protection as best we can for the unknown outlier against us or the many times our setups don't pan out.


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## Wysiwyg

Sir Osisofliver said:


> *Introduction*
> I wanted to write something for the forum – actually I wanted to use the forum members for a sounding board to see where I need to tighten up the text or explain things better before I use it somewhere else.



Hi. I am a keen learner and consider many interpretations of market states to be a perspective held by one observer, many observers, the majority of observers but not all of the observers due to, as motorway pointed out, duration and as I have experienced, belief. A period of interpreted chaos observed on a one minute period chart is not seen on a weekly period chart so in the mind of the weekly observer he sees the market in order.

Is it the end of a trend (non-linearity) on a daily chart if the price range gets comparatively wider and new highs are not being made? Well that is the conundrum the participants are discussing (maybe arguing  and eventually (duration again) the majority of money will decide on trend continuation or a new trend established the other way.   

Can a chart define chaos?


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## Sir Osisofliver

OK so from a couple of PM's I'm seeing that people don't necessarily want a history or mathematics lesson, but would rather want to know how to apply what I'm talking about. 

Don't want to know how I arrived at my conclusions, rather just how to apply chaotic principles in their trading. It rubs against my anal rententive soul to simply show something without explanation and I'll use a simple example...

People think that they know how to apply a stochatic oscillator.

View attachment 44886


Simply looking at the above image gives the impression that you can use the oscillator to give you a buy *and* a sell signal.  Due to a lack of understanding of the math behind the indicator, this is a false impression. Because the math limits the price action with a 1-100 range and the price action has no mathematical limitation imposed upon it. It's amazing the number of people I've come across who use that indicator that do not appreciate or understand this.

*Therefore I've decided to sketch out for you in broad (and in some bits not so broad)strokes what I was planning on doing and you can tell me if you want it or not. BUT - don't bitch and whine if you haven't got a carefully constructed framework to lead you to the same conclusions that I drew.*

The next segments I was going to write were along the lines of attempting to prove the chaotic model as it applies to the Market. This has however been done before, I'm only treading on old ground here, (See motorways post for example and the excellent comments from Theodore Modis - see also the works of Benoit Mandlebrot and the application to the financial market). This is not an area without academic controversy - it is not a "given" that the market is chaotic - but may be exhibiting things that *look* like chaos Eg SKC's comment about fuzzy logic. Some of this is due to the repetition that is exhibited by the market - but self replication is an inherent characteristic of chaos. Just go look at the Mandlebrot set to see the *infinite* repetition that occurs in both macro and micro scales. *Exhibiting the same patterns in Macro and Micro scale is going to be highly important.*

Let's assume however that my premise that the market is chaotic is meaningful and move forward. I know it's a huge assumption but we'll never move forward if we can't accept at least provisionally that it's a possibility and listen with an open mind. The proof is in the application after all and what we are trying to do here is *increase our probability of success.* It is the shield that we add to the armour of our other techniques of risk and money management.

Chaos gives rise to order, and I wanted to demonstrate some of the order that lies within the chaotic structure of the market. - This is seen most simply in the boom and bust cycles of our market as a large scale or macro application. (This is why I wanted people to read the pieces in the newbie thread about economic cycles - they are an expression of the macro scale of chaotic order in the market - yet rooted within a fundamental/market awareness type of approach rather than purely technical in nature). I would subtley start discussing the waveform (or the pattern of the broader boom bust cycle) of the various drivers within the macro scale - Interest rates, unemployment etc at this stage (and this will also be really important later on).

This would lead me to discuss the macro applications of chaos that Motorway's post indicates.  That Chaos is at its most visible at end points, and the kinds of things that we can do to ensure that macro Chaos works *for us*. These expressions of macro chaos are fantastic opportunities for wealth creation, especially because there are instruments especially designed for us to make money out of these occurances.

I was going to include a piece here on portfolio construction - because this window of opportunity gives the investor the ability to purchase quality assets at much reduced prices (and high dividend yields) that allow the portfolio to be carried through the smaller and *more chaotic *shorter term expressions, whilst waiting for the larger pattern to emerge. (I'd draw comparisons about what we are seeing now for instance being a shorter-term expression of chaos within the larger pattern and compare chart patterns with what we saw after 1987 stock market correction).

Included within this section is a mathematics peer reviewed article - which boils down to..... the larger the data sample set, the more accurate chaotic modelling techniques become and demonstrate this with with the use of Fibonnacci Sequences, Fractal Geometry and Elliott Wave analysis, as three purely technical methods of assessing the macro chaotic structure...what some of us do already. There would be a small aside here when discussing the application of Fibbonacci, that these ratio's have been found within Mandlebrot's set, and discussing the importance of irrational numbers like Fibonacci and Pi when discussing growth patterns.

I'd talk about how this expression is also visible in fundamental techniques, giving tools about how to use yield curves, aggregate sector yields and comparatives to past cycles or expressions. This then is our shield for our knight on the macro scale - a combination of technical and fundamental techniques (because you *always* look for multiple conformation when dealing with chaos) that can allow you to objectively analyse the chaotic expression *and take advantage of it on a macro scale.*

We would then get to talk about micro applications - Where things *really* get fuzzy and hard to understand. Wysiwyg made an excellent and pertinent comment that chaos is in the eye of the observer...and over what time period you happen to be observing. Time is therefore a critical component of chaos. Taking a simple moving average smooths out the chaotic effects that are seen in trading price action on a shorter time scale. You look at a daily chart and overlay a weekly chart and you can *see* the chaotic influences in shorter term timescales. 

What we then need to identify on *whatever timescale you are working on*to *increase our probability of success* - in addition to the other trading *necessities* of positional sizing, money management and risk management techniques (which I would cover off - just like I would have spoken about portfolio management) is the following: -

1) component waveforms that exist in the price action - As you can see this is going to be highly dependent upon whatever stock or instruments you are looking at. Some will have more wave form components than others (or at least more that are easily identifiable) Eg Mining company exposed to a single commodity is going to have the underlying commodity price wave form - but what other component wave forms can you see? Exchange rates? General market direction waveform? etc etc.

2) Why do I want the waveforms? because this will assist in identifying the phase shifts (the most visible forms of chaos on the shorter term time scale) that occur within the price action. When you have identified those wave forms with the highest Probabilistic Causation, the points where those phase shifts overlay in *aggregate* react the same way that the broader market correction does. * (just like the waveforms that exist in the macro scale when we look at the entire market - see I told you that the same patterns in macro and micro were important indicators of chaos).*

With this in mind, the application to micro principles can guide us into looking at stocks or instruments that give us a *higher probability of success when combined with other methods,* this then is the shield our knight carries around. It doesn't *always* stop us getting bashed but it *does* increase our probability of success (at least in my experience and when it's done right - by a statistically significant amount).

@ Tech I know you asked me in my newbie thread why I spend so much time paper trading (because you thought it was madness) and I told you that some of things I was doing mixed fundamental data with technical. The above is a bit more detailed than the answer I gave at that time. Can you appreciate why it might take me nine months of system testing to validate a strategy which takes advantage of chaotic principles on shorter term time scales? I'm trying to identify and map all the waveforms that influence whatever instrument I'm analysing to increase my probability of success.

Now I've been doing this for a while so I have some ground rules which have evolved through plenty of hard work...which unfortunately if I am going to turn this into a book, training course, lecture series or something in the future I will be keeping to myself. Feel free to discuss what these ground rules might be, what underlying instruments might be the best, how you might apply this to an instrument I've never looked at  but I won't confirm or deny any of the rules I've established.

Cheers (I need a drink now)

Sir O


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## Sir Osisofliver

Bah! I stuffed up the attachment of the Stochastic Oscillator.  Would one of you sterling mods fix that?

Cheers 

Sir O


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## Joe Blow

Sir Osisofliver said:


> Bah! I stuffed up the attachment of the Stochastic Oscillator.  Would one of you sterling mods fix that?
> 
> Cheers
> 
> Sir O




Hi Sir O,

It's saying that the attachment is invalid. Can you try reposting the entire post, including the attachment, and I'll clean up afterwards.


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## suhm

Hey Sir O,

Are your thoughts somewhere along the line of The (Mis)Behaviour of Markets: A Fractal View of Risk, Ruin and Reward by Mandelbrot, its awhile since I read it but had the same sort of flavour.

Your thoughts are intersting but I'm not sure how I would apply it but reading in anticipation.

suhm


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## Sir Osisofliver

@ suhm

It is almost required reading 

Ah well that's the rub isn't it? I know how to apply it to a couple of instruments and I know that it increases the consistency of the system I have designed.

I have some rules I have developed around it but I am smart enough to know that for it to apply to something new requires a significant depth of knowledge in the underlying instrument. 

Cheers

Sir O


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## Sir Osisofliver

Okay guys and girls help me out here.

What would you do?

1 Keep it to yourself until you can buy a small country.

2 Set up a company, hire the talent I don't have, ( coz I will need a computer genius to transform it into an easily understood visually orientated system) and then spend the rest of my days finding ways to apply it and sell it to the world.

3 write a book or course and charge a mint in the methodology ( but not reveal the system I built)

4 something else?

Cheers

Sir O


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## MacP

> Therefore I've decided to sketch out for you in broad (and in some bits not so broad)strokes what I was planning on doing and *you can tell me if you want it or not*. BUT - don't bitch and whine if you haven't got a carefully constructed framework to lead you to the same conclusions that I drew.




Hello Sir O,

Firstly thanks for offering up this knowledge and insight for discussion and education.

IMHO, your intention appears to be to engage a broad base and skipping foundation explanations will merely cap your readership and thus constrain discussion. Surely some revision of known concepts by the advanced members is a small premium to pay?

When you lecture/author/package it for commercial consumption, I assume you will be seeking to make sure it is accessible to the largest customer base, and  it will be necessary to bring the less advanced with you.

Cheers and thanks again
MacP


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## Gringotts Bank

Sir Osisofliver said:


> Okay guys and girls help me out here.
> 
> What would you do?
> 
> 1 Keep it to yourself until you can buy a small country.
> 
> 2 Set up a company, hire the talent I don't have, ( coz I will need a computer genius to transform it into an easily understood visually orientated system) and then spend the rest of my days finding ways to apply it and sell it to the world.
> 
> 3 write a book or course and charge a mint in the methodology ( but not reveal the system I built)
> 
> 4 something else?
> 
> Cheers
> 
> Sir O




O, what %annual return have you made trading this way?  Can you show us an equity curve?  Can you show us broker statements, even for a short period?

If I really had a system that could make massive returns consistently, I'd train family members how to use it, so that if I died they could use it.  Then I'd work towards buying that small country.  I'd also invest heavily in protecting the system from others who would want to steal it.  After a while I'd set up a charity and get people to trade it for me.  As much as I'd like to get in on something that worked really well, I wouldn't be sharing it with me!!

Money making machines are possible (though rare) - HFT proved that.  Best of luck O!


----------



## boofis

I'm a complete market novice, but am an avid maths lover. I just want to clarify what exactly you're claiming here Sir O?


----------



## MacP

Sir Osisofliver said:


> Okay guys and girls help me out here.
> 
> What would you do?
> 
> 1 Keep it to yourself until you can buy a small country.
> 
> 2 Set up a company, hire the talent I don't have, ( coz I will need a computer genius to transform it into an easily understood visually orientated system) and then spend the rest of my days finding ways to apply it and sell it to the world.
> 
> 3 write a book or course and charge a mint in the methodology ( but not reveal the system I built)
> 
> 4 something else?
> 
> Cheers
> 
> Sir O




I'd be leading out with Option 3 over Option 2. Less capital outlay and your IP remains secure. At the same time, progressing Option 1. :grinsking


----------



## basilio

Well it's certainly an intriguing thread  Sir Osis.....

On my understanding of chaos theory it works through non linear equations with  feedback loops that create multiple answers rather than a single clear result. The fascinating parts about it are :-

1) Inside these seeming random answers there is a repeated picture/result that comes up as the equation is continued into millions of repetitions.  These are described as fractals. This is represented pictorially by the Mandelbrot set.

2) The mathematical basis of chaos theory is represented across almost all natural processes. It is seen in the shapes of trees, landforms, human  organs. Because it is such an excellent descripter of our physical reality many scientists see it as  a major advance in understanding the world.

In relation to using chaos theory to understand and describe the  stock markets....
Frankly I haven't  yet understood what you have  discussed. 

In my mind however I have several parallel almost schizophrenic ideas on what is happening.

1)* Traditional rational view *. We have an informed market where  investors analyze stocks according to information gained and the shares rise or fall according to  their success in the real world. (_This model seems to  be favoured by stockbrokers and analysts who want to persuade us to invest on the basis of their  extensive, incisive and totally professional analysis......_)

2) *Significantly shonky story telling* What actually happens far too often in the market is that many companies are floated purely to make money *on the float and the trading of the shares. * The actual enterprise is quite secondary to creating a story that will attract investors and allow initial directors and promoters to churn profits regardless of the economic activity undertaken by the company. 

This is the world of ramps, bubbles, takeovers, deals,  hyper activity. It can make far more quick money  than actually running business  so it is favoured by  most players in the market even though they know it is shonky .. as long as they think they are on the  right side of the deal. (_For example  many people in Bernard Madoffs  scheme believed he was front running or  undertaking some other form of illegal activity. But they were happy to be part of it while it was seemingly profitable. Similarly we are seeing the many investment funds that made enormous profits by insider trading being exposed._

3) *A surreal market that pointedly ignores physical realities.* The premise of our capitalist system is continuing exponential growth. We know (or should know ?)  that this is impossible in a finite physical system but we still accept it as the basis for our economic system. Similarly all companies are attempting to grow bigger and bigger but we know for certain that most cannot  achieve their objectives given the limitations of the market.  For example  it is totally impossible for more than a very small proportion of people to build up the massive property or share portfolios that advisors deem essential for an adequate retirement. It just physically can't be done. But that doesn't stop all the "advisors" sagely trying to convince everyone that if people give them their money to invest they can achieve  this financial independence.

In the end of course the most successful retirement plan becomes the advisors.

4) *The inevitable clash of conflicting realities.* This is probably where we are now. Consider for example companies with sound businesses, excellent management, great technology and plenty of capital.  On paper holding those shares  could make you feel like you are sitting with 4 Aces in a poker game and the certainty that you will clean up every other player in the game.

*But what if your playing in the gaming rooms of the Titanic *? Yes you end up with a pocket full of gold sovereigns but you also end up at the bottom of the sea because you didn't recognise that the ship was sinking and that the long game was folding your unbeatable hand and finding a lifeboat.

In my mind it is very, very,  hard to see how the current financial  indebtedness can be resolved without  major financial collapse/restructuring. On a slightly longer time scale the issues of resource failure (energy, minerals, soil, water) seem self evident as  factors that will crash our economies and crush the markets.

And finally the impact of climate change on the physical conditions of our world _(unless recognised and addressed immediately_) seem certain to send us back to pre-civilization conditions.

(To deny the last 2 points you have to take the view that the vast majority of the science community is incompetent and/or corrupt. I feel that the accusation of incompetence and corruption  is a more accurate reflection of the investment and business community as we see it today)

Anyway that's my 2 cents worth in this discussion.

http://www.tnellen.com/alt/chaos.html


----------



## wayneL

basilio said:


> And finally the impact of climate change on the physical conditions of our world _(unless recognised and addressed immediately_) seem certain to send us back to pre-civilization conditions.
> 
> (To deny the last 2 points you have to take the view that the vast majority of the science community is incompetent and/or corrupt. I feel that the accusation of incompetence and corruption  is a more accurate reflection of the investment and business community as we see it today)
> 
> Anyway that's my 2 cents worth in this discussion.
> 
> http://www.tnellen.com/alt/chaos.html




basilio,

I was enjoying the balance of your post until you came to your hobby horse.

Please, this is not the place for CC activism, don't derail Sir O's thread with extraneous contentious issues.


----------



## wayneL

Sir O,

Chaos theory has intrigued me for some time, looking forward to what more you have to say.


----------



## basilio

Wayne I don't accept your criticism of my introduction of CC effects as one factor to be considered when dealing with the  real world and the share market which should reflect that.

Obviously I have given up attempting to discuss this issue on other forums because clearly most people here have simply stuck their fingers in their ears and gone "la,la la" to drown out the evidence.

But that doesn't change what is actually happening (and is recognized by almost all capable people) with all the subsequent follow on effects.  CC is not fluffing on about about unicorns or Mayan end of world stories and as such recognising the implications is part of the picture of most businesses.

My last point was noting the clash of conflicting realities on the rosy picture we would like to see happen in our world. Financial  instability, indebtedness, resource limitations *and CC* are part of this picture. It would be a big oversight not to assign a weighting to one scenario that is very compelling when considering the movement of the economy and the share market.

My point of folding a seemingly unbeatable hand and heading for the lifeboats is still valid if the example cited is total financial collapse or resource collapse.
_______________________________________________________________

If there is another theory that might add something to the debate it could be the Minsky  Moment theory. I think it shows up a common theme in all markets that have become excessively optimistic and has elements of chaos theory in it with the continual re emergence of  sudden collapses in strained markets.

http://www.investopedia.com/terms/m/minskymoment.asp#axzz1angdY8YA


----------



## wayneL

basilio said:


> Wayne I don't accept your criticism of my introduction of CC effects as one factor to be considered when dealing with the  real world and the share market which should reflect that.




Within the context of this thread, it is off topic.

I repeat, do not hijack this thread. There is a specific thread for AGW discussion, or if you want to discuss AGW as it relates to markets, start a new thread on that.


----------



## Sir Osisofliver

Gringotts Bank said:


> O, what %annual return have you made trading this way?  Can you show us an equity curve?  Can you show us broker statements, even for a short period?




The control model has returned 34.78% the chaos model returned 49.34% over the same trades, over 13 months of live trade duration. (net of commission) On average there is about 8 trades a week (I have to search for them manually I cannot scan for them). In nine months of back testing I tested a sample set of ~1750 trades which gave me a greater expectancy (+48% over my control model) beyond this, I won't be sharing.... If I showed you actual transactions (and I do appreciate why you want to see them) you might figure out some of the guidelines I use.




> If I really had a system that could make massive returns consistently, I'd train family members how to use it, so that if I died they could use it.  Then I'd work towards buying that small country.  I'd also invest heavily in protecting the system from others who would want to steal it.  After a while I'd set up a charity and get people to trade it for me.  As much as I'd like to get in on something that worked really well, I wouldn't be sharing it with me!!
> 
> Money making machines are possible (though rare) - HFT proved that.  Best of luck O!


----------



## tech/a

I see what your getting at.
The logic is sound---it's a rational way to view chaos and factors which in your testing appear to have directed chaos long enough in the direction you wish to profit from.

Personally I'd pay for the macro so I could work on my own design of the micro.
Many questions arise
How long does your identified Macro in x last IE cycle life.?
Do all instruments conform as expected to the macro influence?
Do they in their own individual sense remove chaos enough to allow predictable application? 
Can they be recognized early enough to be of use or have the really profitable moves finished by the time a cycle has been validated?

Just some early thoughts.


----------



## Gringotts Bank

Sir Osisofliver said:


> The control model has returned 34.78% the chaos model returned 49.34% over the same trades, over 13 months of live trade duration. (net of commission) On average there is about 8 trades a week (I have to search for them manually I cannot scan for them). In nine months of back testing I tested a sample set of ~1750 trades which gave me a greater expectancy (+48% over my control model) beyond this, I won't be sharing.... If I showed you actual transactions (and I do appreciate why you want to see them) you might figure out some of the guidelines I use.




Great thanks.  I have a few more questions:

-Can we see the equity curve or see the trade stats (without individual trade details)?

-What instruments are traded with these systems?

-Is it up and down-scalable?  

-Can it be leveraged safely for greater returns?  (bit hard to buy a small country on 40%pa return, as good as it is! )


----------



## Garpal Gumnut

Thanks Sir Osis,

Your thoughts on capturing chaotic patterns in the markets remind me somewhat of Steidlmayer's theories on price action, profile, which I studied some years ago.

This is a very interesting thread.

gg


----------



## Sir Osisofliver

Gringotts Bank said:


> Great thanks.  I have a few more questions:
> 
> -Can we see the equity curve or see the trade stats (without individual trade details)?
> 
> -What instruments are traded with these systems?
> 
> -Is it up and down-scalable?
> 
> -Can it be leveraged safely for greater returns?  (bit hard to buy a small country on 40%pa return, as good as it is! )




1 I'll think about it

2 some instruments are better than others. I know that isn't what you were looking for but I am not sure how much I should share on the forum.

3 in terms of the funds required to run the system it needs the same sort of funds to achieve consistency as any other trading system. I don't use more than 2% of account at risk.

4 I would imagine it would depend on the nature of the leveraging instrument. I haven't wanted to use leverage during the testing phase.


----------



## mazzatelli

Sir Osisofliver said:


> 1 Keep it to yourself until you can buy a small country.
> 
> 2 Set up a company, hire the talent I don't have, ( coz I will need a computer genius to transform it into an easily understood visually orientated system) and then spend the rest of my days finding ways to apply it and sell it to the world.



 Hire the talent you don't have to develop this computationally and then keep it for yourself.


----------



## Gringotts Bank

Sir Osisofliver said:


> 1 I'll think about it
> 
> 2 some instruments are better than others. I know that isn't what you were looking for but I am not sure how much I should share on the forum.
> 
> 3 in terms of the funds required to run the system it needs the same sort of funds to achieve consistency as any other trading system. I don't use more than 2% of account at risk.
> 
> 4 I would imagine it would depend on the nature of the leveraging instrument. I haven't wanted to use leverage during the testing phase.




Re: scalability, obviously if it trades Australian _equities _outside the top 20, there will be limits as to how much money I can throw at each trade without affecting the SP.  The other thing about scalability is it will affect how many people you can share this with.  If you have 100 subscribers all buying and selling the same stocks at once, suddenly the system's performance deteriorates.  If on the other hand it's a forex system, scalability is so much better because of the sheer amount of money flowing around.  You can trade very large sums and feel confident you're not pushing the price around.  That's why I ask about what instruments you use, and scalability.  Someone with $10 mill to trade would pay a huge sum for a system that will return 40% at the end of that year *on that $10 million*.  If it's not a very scalable system, then 40% pa. isn't really all that impressive (I don't mean that rudely).


----------



## basilio

Theres another angle to this and it relates to Gringotts last point on scaleability. 

Back in 2004 another trader recognized that the American housing market was  hopelessly mis priced. Looking at the evidence he was certain there would be a housing collapse and that if he wanted to make a fortune he should be betting against the companies holding housing securities as collateral.  At this stage there seems to be similarities with Sir Osis belief that he has identified a similar situation.

The trick, as  Dr Michael Burry found,  was to create a deep enough and solid enough betting market to ensure that you could collect against the losing side. Perhaps worth checking out his story.

http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004

*



Betting on the Blind Side
Michael Burry always saw the world differently—due, he believed, to the childhood loss of one eye. So when the 32-year-old investor spotted the huge bubble in the subprime-mortgage bond market, in 2004, then created a way to bet against it, he wasn’t surprised that no one understood what he was doing. In an excerpt from his new book, The Big Short, the author charts Burry’s oddball maneuvers, his almost comical dealings with Goldman Sachs and other banks as the market collapsed, and the true reason for his visionary obsession.
		
Click to expand...


*


----------



## motorway

Gringotts Bank said:


> Re: scalability, obviously if it trades Australian _equities _outside the top 20, there will be limits as to how much money I can throw at each trade without affecting the SP.  The other thing about scalability is it will affect how many people you can share this with.  If you have 100 subscribers all buying and selling the same stocks at once, suddenly the system's performance deteriorates.  If on the other hand it's a forex system, scalability is so much better because of the sheer amount of money flowing around.  You can trade very large sums and feel confident you're not pushing the price around.  That's why I ask about what instruments you use, and scalability.  Someone with $10 mill to trade would pay a huge sum for a system that will return 40% at the end of that year *on that $10 million*.  If it's not a very scalable system, then 40% pa. isn't really all that impressive (I don't mean that rudely).




I posted two charts one pre GFC 
The mkt was not chaotic on multiple scales ( not time frames different thing )
The chart on that scale  posted . it did not matter How many entered the trend

*THE TREND COULD ACCOMMODATE  THEM* because chaos did not rule.
Greater participation just led to a more "Order" more trend.

The chart post GFC is where at multiple scales chaos rules.
Here more participation means MORE CHAOS

It is the difference between adding heat to water to do work ( order )
eg generate electricity with a particular structure.
More heat just means more electricity 

or just boiling a *full* pot of water .. more heat just means more chaos .destructive.

You need to make sure you are talking about CHAOS if you mean Chaos
and not Fractals or Self Organization/Complexity ..

Mandelbrot knew and sought the key in the nature of time
If you read his book he suggests complicated solutions ( muti fractal time generators )

Olsen is taking his work on and forward



> Financial data and fractals have always gone hand in hand - one of the first data sets that Mandelbrot had applied his theories to was that of fluctuating cotton prices over several centuries. *"Forget about chaos,"* Dacorogna tells me. "We have never found any chaos in our data. There is no simple formula that generates such behaviour as is found in the foreign exchange markets. A fractal is a more general thing. A fractal produces a measure." The measure Dacorogna, Olsen, MÃ¼ller and the rest of the team were really interested in was that which would measure time.
> 
> One of the reasons that physicists like MÃ¼ller and Dacorogna were willing to pitch in with Olsen was that he had some very interesting ideas about time. Hitherto, economists had always thought of time as outside of the system, a straightforward linear measure that all other changes could be related to.
> 
> But the idea which fired up the Olsen team (as only physicists can be fired up) was that time was instrinsic to the system - that it was somehow dynamic and that a measure of time was needed which could stretch and contract as the system changed. I asked Dacorogna what this meant. "Time eats things," is what he said. "We define time dynamically." Perhaps it's difficult to explain the massive impact of this statement to someone without a background in science or philosophy.




http://ds.dial.pipex.com/town/park/di21/art_tech_ec_files/olsen.htm


Also mention of Minsky in the thread

This is worth reading for macro cycles and the link below ( Modis as some good material  another is Sornette )


Mandelbrot died: discovery of fractals will yet revolutionize economics, today, economists fail to appreciate significance of the discovery.
In popular press Mandelbrot is credited with discovering fat-tailed distributions, real credit goes to Wesley Mitchell (1874-1948) in US.  (R Olsen )


http://findarticles.com/p/articles/mi_qa5437/is_1_35/ai_n28839344/?tag=content;col1





> 1 Keep it to yourself until you can buy a small country.



depends what it is .. There are no real secrets just things that can not be explained.
and things that are not as wonderful ( or terrible ) as we think 


Motorway


----------



## basilio

> Theres another angle to this and it relates to Gringotts last point on scaleability.
> 
> Back in 2004 another trader recognized that the American housing market was  hopelessly mis priced. Looking at the evidence he was certain there would be a housing collapse and that if he wanted to make a fortune he should be betting against the companies holding housing securities as collateral.  At this stage there seems to be similarities with Sir Osis belief that he has identified a similar situation.
> 
> The trick, as  Dr Michael Burry found,  was to create a deep enough and solid enough betting market to ensure that you could collect against the losing side. Perhaps worth checking out his story.




I just read the Micheal Burry article in full. Very enlightening. If you can put aside 30 minutes I think many readers will gain insights into a number of aspects of the stock market (mostly sheer stupidity !)  and investing. 

If this is a representative extract from the whole book The Big Short then that too would be well worth reading.

Cheers


----------



## Sir Osisofliver

Gringotts Bank said:


> Re: scalability, obviously if it trades Australian _equities _outside the top 20, there will be limits as to how much money I can throw at each trade without affecting the SP.  The other thing about scalability is it will affect how many people you can share this with.  If you have 100 subscribers all buying and selling the same stocks at once, suddenly the system's performance deteriorates.  If on the other hand it's a forex system, scalability is so much better because of the sheer amount of money flowing around.  You can trade very large sums and feel confident you're not pushing the price around.  That's why I ask about what instruments you use, and scalability.  Someone with $10 mill to trade would pay a huge sum for a system that will return 40% at the end of that year *on that $10 million*.  If it's not a very scalable system, then 40% pa. isn't really all that impressive (I don't mean that rudely).




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


----------



## Gringotts Bank

Sir Osisofliver said:


> 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




By the way you've worded the question, I'm assuming the answer is 'no'.  I don't understand chaos theory, and don't want to make any effort to do so, so I'm just asking questions from the end-user point of view (if you end up selling your method, that is).   So let's say it's a forex or futures system that's highly scalable and can return 40%pa.  Now what?  Apply for a huge margin loan and trade it for huge profits?  I'm happy for you, but how do I get some of the action?!!  And what about that equity curve!??


----------



## Sir Osisofliver

Gringotts Bank said:


> By the way you've worded the question, I'm assuming the answer is 'no'.  I don't understand chaos theory, and don't want to make any effort to do so, so I'm just asking questions from the end-user point of view (if you end up selling your method, that is).   So let's say it's a forex or futures system that's highly scalable and can return 40%pa.  Now what?  Apply for a huge margin loan and trade it for huge profits?  I'm happy for you, but how do I get some of the action?!!  And what about that equity curve!??




Gringotts,

Cool your jets buddy. I appreciate that you're approaching this from and end-user point of view and being a sceptic. It gives me insight into the kind of things I may need to provide if I were to sell this as a product of some kind. However, *IF* (and it's a big if) I share the methodology it will be some time away before I can produce a polished product. What you're talking about as an end user would require that I hire some talent that can turn what is currently a whole bunch of numbers that makes my computer groan with effort into a visually orientated indicator. 

There is also the issue of training. With the variables involved - it is nowhere near as simple as changing the sample period, altering the std deviation etc etc - that a normal indicator has. Then there is the issue of phase shifts occuring (where the length of the component waveform changes - most commonly at the end of a cycle). If I preset an indicator, it would not remain valid forever. The people who do not understand what is happening would thow their hands up in digust and say it doesn't work or that it is giving false signals.

Anyway I had a think and I'm posting a couple of equity curves - but I've taken out the X&Y axis.

Cheers

Sir O


----------



## Sir Osisofliver

@ Motorway

I really want to engage you in some discussion in the thread. You've raised some excellent material that is worthy of discussion. I need some time to do it properly however but wanted to thank-you for your contributions.

@ Everyone else

Now that you have the broad brush stroke version - should I leave it there or try and continue to build when I have time?

Cheers

Sir O


----------



## Gringotts Bank

Oh come onnnnn!  That chart means _nothing_, and you know it.

What is this thread but a tease?  What's the point?  

You have people interested.  Fine.  Now what?  Where's this going? 

If your system is 5 years off going commercial, tell us and I'll stop posting.

If it's about thrashing out ideas about chaos theory, get on with it.  95% of people reading won't understand it.


----------



## Sir Osisofliver

Gringotts Bank said:


> Oh come onnnnn!  That chart means _nothing_, and you know it.
> 
> What is this thread but a tease?  What's the point?
> 
> You have people interested.  Fine.  Now what?  Where's this going?
> 
> If your system is 5 years off going commercial, tell us and I'll stop posting.
> 
> If it's about thrashing out ideas about chaos theory, get on with it.  95% of people reading won't understand it.




You didn't get any meaning from that?  Not even that you can visually see that the chaos model equity curve has a degree of unpredictability taken out of it? That's why I posted it after all.

Gringotts - as I said before for me to produce this as a course/book/ system package with special indicators (or whatever) will take a considerable period of time. I would need to devote myself to this in full-time development (If I choose to do it at all). The purpose of this thread was to find out (where people with a range of experience in trading) have difficulty with the material. *Not* simply give away all my hard work on this which I would consider to be my Intellectual Property. 



> actually I wanted to use the forum members for a sounding board to see where I need to tighten up the text or explain things better before I use it somewhere else.




I get it - you don't want to understand it - you just want to verify that it works and then use it to improve your own trading.

I'm sorry if I wasn't clear about my aim here - but I have to ask myself that if I write this up and the majority of people are in the same boat as you - what's the point of publishing it? I'd be better off in making a system of some kind and selling that and keeping the IP to myself.

@ Everyone - Given you've only seen the broad stuff - Is it simply far too complex to try and sell and sell a "this is how it works - now go apply it to your own trading"?

Cheers

Sir O


----------



## Gringotts Bank

You're right, there is no point in publishing it for the mass trader/investor, because they either won't understand it, or even if they have the _capacity _to understand it, are not interested in investing the required time.  

You could publish it in a journal of finance, but what's the point in being an academic?  No point at all.  

Ward systems (Neuroshell, Chaos Hunter etc) have the right approach.  Their software developers have taken extremely complex tasks and made them so that any doofus can use them.  Their support and background literature is easy to understand and apply.  You'd pay a fortune over many many, years to get someone to do that for you properly, the way they have. For those that have the maths background, Ward systems products will allow virtually unlimited scope.  The internet is littered with trading software that is just total bullsh1t.... completely unusable.  You need to be very skillful at communicating the written word, and I don't think you have that skill (again, no offense).  I know you understand it, but imparting that to others is a whole new ball game.

So the way I see it you have two options - 
1.  Sell the whole thing to a hedge fund, offering to go on staff and help the IT guys develop it into something usable.
2.  Trade it yourself.


----------



## peter2

Sir O: The thread started out with the potential to be both challenging and thought provoking. I knew that I would have to read it carefully to grasp some of the broad concepts in a field that I know little. I am disappointed that you decided not to take us on a journey of discovery where new ideas and other ways of interpreting the market data would surprise me as we journeyed forth. 

I would describe your trading as just another pattern trading strategy. You have identified a pattern that repeats enough to profit by its existence. Very simplistic I know but the thread didn't explore the concepts and their application fully for me to appreciate the extent of your IP. 

I would ask you to consider resuming the journey rather than be distracted by the pot of gold at the end of the rainbow.


----------



## Gringotts Bank

I've just realized that's the answer, O.

Buy Chaos Hunter software, $1500.  Input your fundamental and technical data there.  Will give you everything you need, and more.

For this little bit of priceless advice, I'd like you to PM me the inputs.  I've just saved you tens of thouasands of dollars and years of system development.


----------



## Sir Osisofliver

peter2 said:


> Sir O: The thread started out with the potential to be both challenging and thought provoking. I knew that I would have to read it carefully to grasp some of the broad concepts in a field that I know little. I am disappointed that you decided not to take us on a journey of discovery where new ideas and other ways of interpreting the market data would surprise me as we journeyed forth.
> 
> I would describe your trading as just another pattern trading strategy. You have identified a pattern that repeats enough to profit by its existence. Very simplistic I know but the thread didn't explore the concepts and their application fully for me to appreciate the extent of your IP.
> 
> I would ask you to consider resuming the journey rather than be distracted by the pot of gold at the end of the rainbow.




So that's one person who wants me to continue...and I still want to talk to Motorway...anyone else want me to keep plugging away?

Cheers

Sir O


----------



## motorway

Gringotts Bank said:


> I've just realized that's the answer, O.
> 
> Buy Chaos Hunter software, $1500.  Input your fundamental and technical data there.  Will give you everything you need, and more.
> 
> For this little bit of priceless advice, I'd like you to PM me the inputs.  I've just saved you tens of thouasands of dollars and years of system development.




Chaos Hunter _might be OK_.. But the _secret_ is to be found in asking the right questions , and in the correct _syntax_ .

 A spread sheet could do this...

The _secret_ is in to do with what is the nature of X that is correlated to the Ys

Ys are all the things you can think of
( The market properties you are interested in )

The _ italics_ are because it isn't a real _secret_

Motorway


This====> Does not fill me with confidence


> ChaosHunter requires that you enter text files of historical or example data from spreadsheets or data feeds. Then you choose arithmetic and other math functions that you want ChaosHunter to use, and it produces numeric formulas that you can read, understand, utilize or even sell outside of ChaosHunter.  ChaosHunter functions available include neural network and chaotic functions.
> 
> Buy/sell signals generated by ChaosHunter formulas can be transferred to many popular trading platforms, which enables you to trade your models with a number of brokerages.  We have made ChaosHunter model transfer easier with ready-made interfaces to the following platforms:


----------



## RandR

Sir Osisofliver said:


> So that's one person who wants me to continue...and I still want to talk to Motorway...anyone else want me to keep plugging away?
> 
> Cheers
> 
> Sir O




Ive been enjoying it ! Ive been enjoying the in depth reasoning and discussion of the theory ....

But I think you need to work on coming across 'in laymans terms' a touch more.

Am I on the right path with the following ? ...

1. Your identifying macro trends and wave patterns in the economic cycle
2. Your looking for indications/confirmation of the current point in the cycle

3. Your identifying the results of these macro patterns at previous points on specific equities etc.
4. Your looking for indications that the equities etc. will conform to previously identified patterns in the economic cycle.

Am I way off and need to re read the thread or fairly close ?


----------



## Gringotts Bank

motorway said:


> Chaos Hunter _might be OK_.. But the _secret_ is to be found in asking the right questions , and in the correct _syntax_ .
> 
> A spread sheet could do this...
> 
> The _secret_ is in to do with what is the nature of X that is correlated to the Ys
> 
> Ys are all the things you can think of
> ( The market properties you are interested in )
> 
> The _ italics_ are because it isn't a real _secret_
> 
> Motorway
> 
> 
> This====> Does not fill me with confidence




According to Ward, the secret, (if there is one), is in choosing ther right inputs.  CH works out the syntax for you.  That's it's job.  The manual explains how it works.  It's all there.  O isn't going to share anything of value.  It's called grandstanding.  Big freakin deal!


----------



## MacP

Sir Osisofliver said:


> So that's one person who wants me to continue...and I still want to talk to Motorway...anyone else want me to keep plugging away?
> 
> Cheers
> 
> Sir O




Yes, please do.


----------



## KurwaJegoMac

Gringotts Bank said:


> According to Ward, the secret, (if there is one), is in choosing ther right inputs.  CH works out the syntax for you.  That's it's job.  The manual explains how it works.  It's all there.  O isn't going to share anything of value.  It's called grandstanding.  Big freakin deal!




Sir Osisofliver quite clearly stated, in the very first paragraph of his first post, that the purpose of this thread was to serve as a sounding board, to bounce ideas and for comments on how to tighten up his text. So dont talk rubbish that his intentions have not been made clear. 

You asked (selfishly and rudely) for the end user specifications and Sir Osisofliver denied your request. Then you proceed to whinge like a spoiled child because you didnt get your way. If you have no desire to adhere to the original premise of the thread then just go away and stop with the childish antics. 

Sir Osisofliver, please continue with your original few posts. I agree with your original statement that it's worth understanding the foundations first. Coming from a Chemical Engineering background I've Looked at chatoic systems in fluid, reactions, etc. your original posts align with what i know, but i never thought to apply it to investing due to what i perceived to be too many variables present. Without repeatable observations i dont see how it can be applied to markets - i dont have the investing experience yet but keen to read more about your epiphany.


----------



## Sir Osisofliver

All right so I've had a re-think. Instead of leading out and trying to prove that the market is chaotic (which I've said is a- not a new concept and b- probably where we might get bogged down) I've decided to shift the order around. I am simply going to post some references for you to read or not read - your choice and then I want to demonstrate the principles of how we can take advantage of the Macro expression of chaotic principles on the economic cycle, and *then* discuss the implications and the things that are important to assist understanding.

Below are some links (not an exhaustive list) of useful infomration. - This is academia guys and girls - some of this stuff is major headache inducing.

1) Probabilistic causation  http://en.wikipedia.org/wiki/Probabilistic_causation - I know it's just wiki - but this will give you a starting point. It's only us nerds that go read the cited reference materials.

2) Analysing Chaos Models - http://www.newton.ac.uk/programmes/HOP/seminars/070310001.pdf - This one is bitchingly math heavy.

3) http://necsi.edu/projects/baranger/cce.pdf

4) http://iic.wiki.fgv.br/file/view/CH...+APPLICATION,+AND+MANAGERIALIMPLICATIONS.pdf 

5)  http://sprott.physics.wisc.edu/chaostsa/

6) http://gwydir.demon.co.uk/jo/numbers/interest/golden.htm - Irrational number sequences 

Below I've reposted some info from my newbie thread - I'm going to expand on it a bit - but not today.

Economic Cycles and how to spot them


Our market is cyclical. CYCLICAL. As is *every* market. Do not delude yourself that somehow *this* current market is different.  Do not listen to the crowing of a broker who spouts rubbish about supercycles and how the emergence of China will create a cycle that will last for twenty years. (I heard this at the tail end of the last cycle) Do not listen to those that say *"We are different"*. We are the same as everyone else because the things that drive us *are the same.* Therefore the market goes through periods of boom and bust. NEVER THINK OTHERWISE.

Historically our market is rising roughly 80% of the time and during this time we are all gods. It's *easy* to make money when the market is rising. It is however the 20% of time that tends to kill people. This is where the cowboys and those that have let the excitement and emotion of the bull run lead them into disaster as we approach the *inevitable correction.* Every cycle there will be someone who thinks that the conditions that we see now are going to stay around, (or that the correction won't be bad). This is where the Storm financials, the Opus Primes, the Tricoms, lose money and destroy wealth for their clients. They do NOT understand the principle of the economic cycle and how to use this to their *advantage*.

So the biggest question is How do you tell when everything is *about* to go pear shaped? What are the signals?  What do I look for to know when it's time to liquidate or protect my share market assets?

Economic Clock
View attachment 42839
View attachment 42840


If you do a search for Economic Clock you'll get images like those I have attached above (hopefully). The Economic clock dates back to the 1930's where it was proposed as a forecasting methodology by English Economists and released in the London Evening Standard as a series of articles.  The basic theory is that certain events which are:

a) Easily recognizable; and
b) highly correlated;

will allow you to ascertain at which point of the broader economic cycle we currently sit. Theoretically if you know where we are in the cycle, you know which asset class in a broad sense is the correct one to invest in for an optimal investment. Each event is related to the previous event. Each previous event *causes* the following event to occur. It's Cause and Effect, but in a cycle of events that roll around and around in a never ending cycle.

You'll note some differences in the two diagrams I attached, even though the basic principals of one event following another event in a series remains intact. This is where the theory gets subjective and it's subjective because we are dealing with a mechanism that is attempting to take a complex aggregation of factors and deliver them to you in a simple easy to understand diagram. The clock does not tell good time. The clock is an imperfect and generic indicator - but is still a valuable tool, particularly for analysing the market over the longer term.

The clock is a simple representation of a complex aggregation and there are differences between the interpretation of the theory because each cycle is an aggregate of several different cycles, with each of these individual cycles having their own characteristics in terms of length, midpoint and amplitude (depth or height). Have a look at the wave below to see what I mean. 

View attachment 42842


Imagine that the wave represents that of the interest rate cycle. This wave will be highly correlated *yet different* to the wave representing the currency cycle. It's only when these two waves move in combination with each other that the effects will be felt.  In terms of the broader economy there are *14 different cycles* that are correlated to a greater or lesser extent. It's only when *all* these cycles move in a negative aggregate direction that our economy as a whole moves into a corrective pattern. Where academics and economists differ is where this cycle of events starts and finishes. Where exactly on the circle do you point to an arbitrary position and say "this is the start of the cycle". It's a cycle...it never ends..hence the differences in the two diagrams and the differences between academics.

I like to conceptualise the 12 o'clock position as being the peak of the share market cycle, and the six o'clock position as the start of the new cycle. From 12 to 6 the market is falling, and other asset classes are more appropriate to invest in. 

Note that because it is an aggregate of a bunch of individual cycles, each time the cycle rolls around, it looks different. Some cycles are 5 years in length, some cycles have been 14 years in length with the long-term average of the cycle 7.8 years.

The important thing to remember is that the *sequence of events around the outside of the clock is always consistent.* Yes they look different each time but the major events (or the signposts if you will) stay the same every cycle. The sequence is consistent.

Now I'm going to add a layer to make the concept a little bit more complex for you. Global economies are correlated. They synchronise their clock's, but they aren't perfectly synchronised. Larger economies tend to lead and smaller economies tend to lag. Australia makes up 1.6% of world economic activity. So we are a very small player. This is GOOD FOR US. Other economies lead the way into and out of booms and busts, meaning that we have a higher level of predictability in our market that the larger economies do NOT. We get an indication of what is to come for us, by looking at larger economies.  This is the reason why I frequently rant at Australian Managed Funds because of their behaviour during the GFC. They could *see* what was about to happen in our economy and they did nothing to protect the assets in their control.

So the clock is a general tool and it is the events on the outside of the clock that determine where you are in terms of the clock. I'm going to focus on the events at the start (bottom) and end (peak) of the share market cycle, rather than go through a full cycle, because I think that will be the limit of the time I can give and then open it up to questions.


----------



## Sir Osisofliver

Start of the Share Market Cycle

What is the trigger for the start of the new share cycle? As we approach the six o'clock position we've already gone through the optimal buying window for both Residential Property and Fixed interest. Interest rates, which started high, have been lowered by the Reserve Bank under their charter to stimulate the economy. This time around the guvmint also handed out great wads of cash in the form of stimulus packages to...you guessed it, stimulate the economy from the depths of recession.

The technical definition of a recession is two consecutive quarters of negative GDP. So this is one of the signals that you will use to determine your position on the clock...are we in a technical recesssion. (Note that the release of these figures is three months after the event so the lag can catch you if you are not aware of it.)

The other main indicator of the start of the new cycle is what is happening in the unemployment cycle. (See the image attached below).



When we look at the chart above you can see how in a general sense it follows a sine wave pattern...IE it's cyclical. You'll also hopefully note the correlation that exists between the peak of that cycle and the bottom of the share market that occured in March 2009. Yes there is a lag effect..it's not a perfect correlation as the unemployment cycle lags the start of the share market cycle, but the peak of the unemployment cycle is significant evidence that we are at the beginning of the new share cycle.

Let me explain what is happening and what drives our economy out of the correction. The guvmint draws back a vast amount of our overseas reserves whith which to employ capital expediture projects (and give free money away making Kevin Rudd everyone's best friend). Reserve Bank has lowered interest rates, making it cheaper and easier for business to do business. HOUSEHOLDERS however at this point in the cycle, are counting every penny. Businesses have been laying off staff. They have to if they want to survive in the corrective environment. The peak of unemployment however is when the company starts re-hiring. All the existing employees breath a sigh of relief because they now feel more secure in their jobs. All those expenses that they have been putting off to put some money away just in case now get paid. The car gets a much needed service, the kids get new school shoes, hubby takes the wife out to dinner etc etc etc and it's this activity and increase in consumer confidence that has a significant effect in driving us out of the recession.

Because these expenses build up and all occur within a very short period of time, this leads share prices to have a bounce at the immediate bottom, (the tipping point if you will) around people being fired and people being hired. See the picture of the All Ords below and note the rapid rise in share prices that occured after the tipping point. Now look at the Unemployment cycle picture. During that initial very profitable rise in share prices, the unemployment cycle only started to improve at the end of that run. Thats the correlated yet lagging effect I was talking about. So your trigger for the start of the new bull market run, is when the unemployment cycle reaches peak, NOT, when it starts to improve.



This is golden time for long-term and savvy investors. Yields are HUGE on some really great shares that have had the **** kicked out of them. Banks with near 10% yield? I'll have me some of that thanks. So Yields (particularly Aggregate yield or EPS) can be used as an indicator to tell whether you are near the bottom of the market. This is an expression of the cyclical market. Brokers are yammering on about great yield and technicals as if they are the be all and end of of analysis. Stochastic this, MACD that.

When the Reserve Bank starts to increase interest rates again (guess where we are in terms of the interest rate cycle), you can be assured that the beginning of the new market has occurred. If you look at one of the clock diagrams in the previous post...you'll see rising share prices as one of the indicators I was talking about. Hey look another cycle 

A bit later and we start to see commodity prices begin to improve, because the stockpiles that were created when the market corrected, have now been eaten into by the increase in demand. Queue another indicator of improvement and the movement of the clock away from the 6 - 7 o'clock position. Good Grief yet another cycle within the broader cycle. 

It's at this time that the Reserve Bank starts to rebuild our overseas reserves, and will continue to raise rates in order to get good purchasing against oversea's currencies. Heaven's yet another cycle within the broader cycle.

It's around this time (say about 8-9 o'clock) that Banks and lending institutions start to free up the credit market. They turn the faucet off in a BIG way as we approach the recession because they can't justify lending money to any tom, dick and harry because heads have rolled because of the stupidity they had when lending to unemployed people to buy houses. (Ok this wasn't us...it was the U.S.  ) and look another cycle.

Mid Cycle

Mid cycle we've reached the old high of the market. Straight away you should be looking at the All Ords and saying OK we are not yet at 9 o'clock. we are between six and nine, but probably after seven because we've had that initial rise in share prices, and an improvement in commodity prices, so we're somewhere between seven and eight. It's this point where the clock tends to slow down. We can sit at this point for a long while whilst we wait for the Synchronisation in Global Economies to occur to lead us to those ecstatic peaks.

End of the cycle (Peak of the market)
Banks are giving credit away like's it's water with a use-by date. Commodities have razor thin stockpiles and prices are jumping like a cockroach on a hot barbeque. Share price yields are looking THIN and brokers are saying...Look its all about the fundamentals.


Okay - now read the above and think about chaos, what is happening?

Cheers

Sir


----------



## Danneman

Sir Osis, I'm following your threads with great interest.

This is highly interesting, especially since I watched a BBC documentary about the mathematics of chaos the other week(pretty light entertainment, mind you). But even these doco's tend to make you think.
The idea was that nothing is as linear as us humans like it to be, or want to believe. And once you push a system (be it economic or climate), it eventually reaches tipping points where the previous rules (i.e the economic clock) don't apply anymore.

Obviously, one would think we would be a such a tipping point in the economic system. It's tempting to think that, being a natural bear, once all highly indebted countries fail like dominoes, no economic rules, but chaos will apply.

It's actually rather depressing..

thanks for your kind donation of knowledge though.. 

Daniel


----------



## Punta

I don't agree that markets are chaotic.  A basic property of a chaotic system is one where a tiny change in the current state of the system leads to large changes in the future state of the system.  E.g. the weather, where the proverbial butterfly flapping it's wings could reasonably affect the formation/path of a hurricane some time later.  

I doubt that the markets behave like this.  It seems unlikely that individual buy/sells affect the prices at some later date, even for the individual securities involved, let alone the entire market.  

The broad market moves (bubbles and crashes) are probably more of a forced response to existing legislation, or innate human nature, or well understood cycles, rather than chaotic.


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## OldFart

Insane.....no wonder the market is all screwed up.....if banks can get away with fraud, why not wallstreet and the newsmedia as well?

Bank Debt Is Near Record Low

http://www.cnbc.com/id/45466176 

and here's why they have no debt:


Secret Fed Loans Helped Banks Net $13B


http://www.bloomberg.com/news/2011-...congress-gave-banks-13-billion-in-income.html


----------



## Sir Osisofliver

Apologies for the absence from this thread guys and girls, as I indicated at the beginning I would post in this thread when I had time. Unfortunately my control and Chaos modelling account with live trades were with MF Global, which has blown what free time I have out the water and put the kibosh on the monetarised trading model.

I do intend to get back into this material but my time is extremely limited and I'm not prepared to give up sleep to write about this...but I wanted to pop in to address punta's comment below...



Punta said:


> I don't agree that markets are chaotic.  A basic property of a chaotic system is one where a tiny change in the current state of the system leads to large changes in the future state of the system.  E.g. the weather, where the proverbial butterfly flapping it's wings could reasonably affect the formation/path of a hurricane some time later.




This statement is correct but somewhat misleading. The weather as you've used in your example is not based within a natural system *which is also a growth model*. Chaos expressed within a natural system which is based upon a growth model would be something like a population curve, or plant growth. Usually there is a constraint on the growth, that creates a replicating pattern of expansion and contraction, but these are still natural patterns that exist within chaotic principles. EG Introduce a new species into an environment such as a cane toad in Queensland and watch what happens. A minor change to the initial conditions IE three more individuals released, may create a vastly different growth rate...an expression of chaos *within* a growth pattern.  Can you see how this would apply to the market?







> I doubt that the markets behave like this.  It seems unlikely that individual buy/sells affect the prices at some later date, even for the individual securities involved, let alone the entire market.
> 
> The broad market moves (bubbles and crashes) are probably more of a forced response to existing legislation, or innate human nature, or well understood cycles, rather than chaotic.


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## 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.


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## Hal2000

Sir Osisofliver said:


> 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. ???


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## 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.


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## CanOz

MrBurns said:


> 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


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## timeless

Sir Osisofliver said:


> *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

Sir Osisofliver said:


> *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.


----------



## DeepState

Evolutionary processes produce outcomes that are on the edge of chaos.  There is an associated concept called complexity theory which is a key focus on the Santa Fe Institute in New Mexico where such matters are examined in enormous depth in a multi-disciplinary way.

The guy who is probably the seminal publisher on this concept for financial markets is Professor Andrew Lo of MIT. The paper is:

Lo A; 2004; "The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective"; Journal of Portfolio Management; Vol 30; No. 5; pp 15-29.

A working paper is available at: http://web.mit.edu/alo/www/Papers/JPM2004.pdf

In my view, this is a very useful paradigm in which to think about the function of markets.  It is vastly superior to to CAPM and so on, with no disrespect there given what they had at the time.  The gross features are good approximations and outcomes display the characteristics as you might expect from an evolutionary model.

Enjoy the hunt, or be hunted...


----------



## Boggo

Interesting video ?
https://pro.dentresearch.com/DOW10/LBNBT200?h=true


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## Wysiwyg

Appealing to the fearful. So sad.


----------



## SirRumpole

Investors now on edge, looking for any reason to cut and run


https://www.abc.net.au/news/2018-10...ooking-for-any-reason-to-cut-and-run/10427464


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## sptrawler

SirRumpole said:


> Investors now on edge, looking for any reason to cut and run
> 
> 
> https://www.abc.net.au/news/2018-10...ooking-for-any-reason-to-cut-and-run/10427464



Good $hit, great to get the stampede happening, bad moon rising. lol
Got to get that part pension ASAP. lol


----------



## PZ99

*A debt crisis is brewing, S&P warns, but don't expect a 2008 rerun*

Debt is higher than before the global financial crisis, making the world vulnerable to economic and market shocks, S&P Global Ratings has warned.

*Key points:*

The world's debt-to-GDP ratio has risen from 208pc in June 2018 to 234pc in June 2018
Emerging markets now account for 31pc of global credit, more than double the proportion in 2008
Chinese companies make up two-fifths of the riskiest corporate debtors
The debt-to-GDP ratio of 234 per cent in June 2018 was considerably higher than 208 per cent in 2008.

But even though the debts are bigger, the big three credit ratings agency believes the risk of a major credit crunch and financial crisis is smaller.

"Global debt is certainly higher — and in many cases riskier — than a decade ago," the report warned.

"Nonetheless, the likelihood of a widespread investor exodus is contained.

"The increased debt is largely driven by advanced-economy sovereign borrowing and domestic-funded Chinese companies, thus mitigating contagion risk."

In absolute terms, the US led the increase in government debt, with an extra $US10.6 trillion in borrowings. China was next at $US5 trillion, and the eurozone borrowed $US2.8 trillion more.

However, on a debt-to-GDP basis, China grew its indebtedness by 71 per cent — albeit from a low base — the US by 60 per cent, and the eurozone by 45 per cent.

The ratings agency said it was not overly concerned about the increase in public debt because investor demand for it remained strong, despite those government debts now being a lot higher than they were back in 2008.

*Chinese corporate debt binge*
The overall increase in debt has been largely driven by Chinese corporations.

"Emerging markets now contribute 31 per cent of global credit, compared to 15 per cent in June 2008. This was largely driven by China," S&P noted.

Looking at almost 12,000 companies, S&P found 61 per cent of firms had "aggressive or highly leveraged" financial risk levels, up slightly from 58 per cent.

It warned that while defaults in recent years have been low, this could change.

"Chinese corporates now make up about two-fifths of the world's aggressive and highly leveraged debt," S&P observed.

"China has the highest-risk corporate sector among the major economies."

However, S&P is also relatively unconcerned about the build-up in Chinese corporate debt.

"The Chinese corporate debt build-up represents a very high credit risk, but a substantial portion of debt is owed by state-owned enterprises, China's economy remains centrally managed and the Government has levers to pull," it argued.

"Most Chinese debt is domestically sourced, implying a limited direct external contagion risk."

Other analysts, such as global real estate firm CBRE's chief economist Richard Barkham, are even more confident that Chinese authorities are already acting to stem last year's economic slowdown.

Mr Barkham described some recent analysis around the global economic slowdown as "a little bit overexaggerated".

"The US is in robust good health, China did slow in 2018 but it's stimulating again, so we think that will pick up, there is a little bit of a slowdown in Europe, but it seems to be associated with the auto sector, and we see a bounce back there," he told The Business.

S&P put the risk of a US recession over the next year between 20-25 per cent, an event that would undoubtedly shake global markets

https://www.abc.net.au/news/2019-03-12/debt-crisis-brewing-but-dont-expect-2008-rerun/10892270


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## sptrawler

Well the ASX over 6400 for the first time since 2007, obviously the looming cloud, has been blown away.


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## Zaxon

sptrawler said:


> Well the ASX over 6400 for the first time since 2007, obviously the looming cloud, has been blown away.




The next step is to rise above its 2007 peak.


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## basilio

Stocks markets are roiling again as Trump  steps up his trade attack on China and now opens a new front on Mexico to force them into "action on asylum seekers..

*Stocks end rocky month lower as Trump widens trade war*

*The stock market stumbled Friday to its first losing month of 2019 in May, primarily due to President Donald Trump's decision to broadly wield his tariff powers, first against China over trade and then against Mexico over immigration.*

* During stocks' month-long slide investors wrestled with the potential impact that the U.S.'s escalating trade war with China could have on corporate and economic growth. Friday's losses came after Trump announced plans via Twitter to impose tariffs on Mexico in a bid to compel the nation's third-biggest trading partner to crack down on migrants attempting to enter the U.S.*
*Watch Now*
*

*
* Dow plunges another 500 points, massive sell-off extends into 2nd day *
*

*
* Stock market plunges, negative for the year *
*The move shocked investors and spurred a broad sell-off that sliced more than 350 points from the Dow Jones Industrial Average. The selling left the benchmark S&P 500 index 6.6% lower for the month, and up 9.8% for the year so far.*
*https://abcnews.go.com/Business/wireStory/stocks-slump-us-expands-trade-war-mexico-63399646*


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## basilio

*Serious troubles in Straits of Hormuz coming.*
Whoever is responsible the risks of a collapse in oil trade through the ME is heightening. 

* Oil tanker attacks will inflame conflict between the US, its allies and Iran *
The explosions, on a vital passageway for the world’s oil supply, may prove Trump’s policy of coercion has backfired

The explosions were bigger and the damage more extensive. But the message and its means of delivery have some similarities.

Thursday’s attacks on two oil tankers in the Gulf of Oman caused jitters in global markets and unease across a region that has been bracing for conflict throughout much of the year. As with the earlier attacks on 12 May, news of the latest strikes was again broken by media outlets aligned to Hezbollah in Lebanon and Iran, who broadcast images of the attacks within minutes of them taking place.

Pictures of both ships ablaze spoke volumes about what is at stake in one of the world’s most strategic waterways, as a regional player withering under ever tightening sanctions stares down a global superpower determined to impose its will.



*  Two oil tankers attacked in Gulf of Oman  *
Read more
Even the hint of obstruction in the strait of Hormuz, where ships pass each other like cars on a four lane motorway, is enough to upset oil markets. Frequent, and seemingly random, bombings of tankers, however, takes fears over energy security to levels not seen since the tanker wars, a byproduct of the Iran-Iraq war of the mid-80s, which sunk or damaged 543 ships in nearby waters and caused three years of turmoil in energy markets. By Thursday afternoon, two large shipping companies had suspended bookings from the Gulf oil ports.
https://www.theguardian.com/books/2...e-conflict-between-the-us-its-allies-and-iran


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## SirRumpole

Can the markets keep rising forever in the face of declining economies ?

Some think not.

https://www.abc.net.au/news/2019-07...t-may-unsettle-booming-stock-markets/11354772


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## basilio

Lot of flashing lights around stock markets and economic news.
*Dow drops 800 points, marking worst day for stock market this year*
https://abcnews.go.com/US/dow-drops-600-points-roller-coaster-markets-continues/story?id=64969484


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## SirRumpole

Is the "inverted yield curve" about to strike again ?

It's preceeded the last 7 recessions.

https://www.abc.net.au/news/2019-08-15/what-is-an-inverted-yield-and-should-we-worry/11415984


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## fedexpress

SirRumpole said:


> Is the "inverted yield curve" about to strike again ?
> 
> It's preceeded the last 7 recessions.
> 
> https://www.abc.net.au/news/2019-08-15/what-is-an-inverted-yield-and-should-we-worry/11415984




Yes, a very scary notion indeed.

Based on all the information available, would it be prudent to sell now and wait for the bargains to come if there were another global recession 2020? I mean if we were to go back in time and wait for the 2008 GFC in 2007, you'd sell down just to buy back once crap hits the fan.

I'm not sure what will happen this time around as the EU, USA, China are all cooked now. I also don't know what will make us bounce back after 10 years of QE with record debt. What would drive growth now that China is on the ropes as well?


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## snilson

there are 3 phases: lateral, trend and news!


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## tinhat

snilson said:


> there are 3 phases: lateral, trend and news!




Hi sn, you say there are three phases. Could you please give examples of each? Very interested.


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## basilio

US Futures market  ahead of opening tonight looking like xhit.


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## Dona Ferentes

basilio said:


> US Futures market  ahead of opening tonight looking like xhit.



*Limit down *, I believe, is the term


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## SirRumpole

I reckon the ASX needs to take a day off and let people settle down.

This looks a lot like panic selling to me.

The market was over-valued, but enough is enough.


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## wayneL

SirRumpole said:


> I reckon the ASX needs to take a day off and let people settle down.
> 
> This looks a lot like panic selling to me.
> 
> The market was over-valued, but enough is enough.



Well, it's still nowhere near value, really.

Overgeared might be a a problem that needs the market to be open for too.


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## SirRumpole

It seems to have recovered somewhat.


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## sptrawler

SirRumpole said:


> I reckon the ASX needs to take a day off and let people settle down.
> 
> This looks a lot like panic selling to me.
> 
> The market was over-valued, but enough is enough.



Oh well, I've started nibbling away today.


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## Garpal Gumnut

I do like observing panic buying and selling.

A brides nightie. 

gg


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## qldfrog

I started playing the vulture today looking at bargain...even after that fall, the PE are incredibly high..no thanks and this is based on past profit with no economic cost of the current crisis


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## sptrawler

qldfrog said:


> I started playing the vulture today looking at bargain...even after that fall, the PE are incredibly high..no thanks and this is based on past profit with no economic cost of the current crisis



From my perspective, the current crash is panic inspired, if the virus goes 'through' I don't see it leaving any lasting problems other than the requirement for more hospitals in the short to medium term.
Just my opinion.


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## qldfrog

sptrawler said:


> From my perspective, the current crash is panic inspired, if the virus goes 'through' I don't see it leaving any lasting problems other than the requirement for more hospitals in the short to medium term.
> Just my opinion.



do not underestimate the selling of the assets of thousands of extra "retired" retired citizens 
Is a funeral a GDP boost? Probably..so we should be OK .....for the one left


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## Ferret

Well, we were due some sort of bounce.  Those buying today are braver than me!


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## sptrawler

Ferret said:


> Well, we were due some sort of bounce.  Those buying today are braver than me!



Do be afraid, climb on the cat.


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## basilio

It will be interesting to see if the investors who bought in the first half hour when SP were well down take their profits by days end.  From what I can see the banks all dropped like a stone and have since recovered.  But for how long ?

The current yields on bank shares and even BHP are extraordinary ! But I don't think anyone believes they can be held in the current circumstances.


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## wayneL

sptrawler said:


> From my perspective, the current crash is panic inspired, if the virus goes 'through' I don't see it leaving any lasting problems other than the requirement for more hospitals in the short to medium term.
> Just my opinion.



The question I have with regards to CV and the current "crash", is, is crash due to CV, or is CV simply the catalyst for what was about to happen anyway?

There is a body of opinion that the "everything bubble" was about to burst anyway,a several hedge funds have been making bets along those lines over the last few months.

I would generally fall into that line of thinking though I have learnt to not disregard the ability for central banks and governments to kick the can along the road.

I have no doubt whatsoever that the world economy will absolutely blow the f*** up at some stage, the only think which I have no idea about is when.

Is this it? Is this finally the endgame? I really have no idea. But what I am beginning to see is severe curtailment on the financial liberties of we plebeians.

To me that serves as an omen.


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## basilio

One could certainly say the markets had been blown skyhigh by  relentless cheap money and the bigger bunny syndrome.

It could definitely been looking for  a fall. CV has just kicked the chair away


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## sptrawler

wayneL said:


> The question I have with regards to CV and the current "crash", is, is crash due to CV, or is CV simply the catalyst for what was about to happen anyway?
> 
> There is a body of opinion that the "everything bubble" was about to burst anyway,a several hedge funds have been making bets along those lines over the last few months.
> 
> I would generally fall into that line of thinking though I have learnt to not disregard the ability for central banks and governments to kick the can along the road.
> 
> I have no doubt whatsoever that the world economy will absolutely blow the f*** up at some stage, the only think which I have no idea about is when.
> 
> Is this it? Is this finally the endgame? I really have no idea. But what I am beginning to see is severe curtailment on the financial liberties of we plebeians.
> 
> To me that serves as an omen.



The way I see it is, if this is the mother of all 'blow ups', then it wont matter because you will probably lose everything.
If it isn't, well then it is just another one of those once in a lifetime events, that people miss out on.
I guess it boils back to whether you are a cup half empty, or a cup half full, sort of person.


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## wayneL

sptrawler said:


> The way I see it is, if this is the mother of all 'blow ups', then it wont matter because you will probably lose everything.
> If it isn't, well then it is just another one of those once in a lifetime events, that people miss out on.
> I guess it boils back to whether you are a cup half empty, or a cup half full, sort of person.



It's another roll of the dice on that score, hey?


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## Garpal Gumnut

wayneL said:


> It's another roll of the dice on that score, hey?



Sex
Water
Tucker
Friends
Not necessarily in that order

gg


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## sptrawler

wayneL said:


> It's another roll of the dice on that score, hey?



All part of life's rich pageant.


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## qldfrog

Historical data would imply a normal PE of between 11 and 14, around 7 for financial and similar due to leveraging in banks ,or  for even lower for miners due to depletion of assets
If you find anything priced reasonably aka within this range, tell me
Then i can look at stability of earnings..
Wow col and bhp are still very high in that regard.did not even look at banks


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## sptrawler

Garpal Gumnut said:


> Sex
> Water
> Tucker
> Friends
> Not necessarily in that order
> 
> gg



Spot on GG, people get way too bogged down, in things they have no control over.
They need to come up and smell the roses.


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## wayneL

Garpal Gumnut said:


> Sex
> Water
> Tucker
> Friends
> Not necessarily in that order
> 
> gg



This may be the most important post in the last several months.

Well said GG


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## SirRumpole

wayneL said:


> The question I have with regards to CV and the current "crash", is, is crash due to CV, or is CV simply the catalyst for what was about to happen anyway?
> 
> There is a body of opinion that the "everything bubble" was about to burst anyway,a several hedge funds have been making bets along those lines over the last few months.
> 
> I would generally fall into that line of thinking though I have learnt to not disregard the ability for central banks and governments to kick the can along the road.
> 
> I have no doubt whatsoever that the world economy will absolutely blow the f*** up at some stage, the only think which I have no idea about is when.
> 
> Is this it? Is this finally the endgame? I really have no idea. But what I am beginning to see is severe curtailment on the financial liberties of we plebeians.
> 
> To me that serves as an omen.




Yes I think the market was definitely overvalued, driven up by cheap money as bas said and the fact that people can't get a good return from the banks. It wasn't representative of the real global economy which has been tanking for some time. Do don't keep cutting interest rates in a healthy economy do you ?

Why the global economy is tanking is the real question.

I reckon it can be laid at the feet of globalisation and the way it's been managed by the corporations and governments.

Industries have been transferred to Third World Countries, but employees there aren't paid much more than slaves. The consuming power of the First World has been decimated by the loss of jobs due to the transfer of industry and mechanisation/automation of many industries. Governments haven't realised the side effects of globalisation and have not taken action to protect their citizens from it.

Big corporations have been making profits and sacking staff at the same time. The circulation of money is broken. The only politician who seems to recognise this (in his charmingly naive way) is <gulp> Donald Trump.


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## sptrawler

SirRumpole said:


> Yes I think the market was definitely overvalued, driven up by cheap money as bas said and the fact that people can't get a good return from the banks. It wasn't representative of the real global economy which has been tanking for some time. Do don't keep cutting interest rates in a healthy economy do you ?
> 
> Why the global economy is tanking is the real question.
> 
> I reckon it can be laid at the feet of globalisation and the way it's been managed by the corporations and governments.
> 
> Industries have been transferred to Third World Countries, but employees there aren't paid much more than slaves. The consuming power of the First World has been decimated by the loss of jobs due to the transfer of industry and mechanisation/automation of many industries. Governments haven't realised the side effects of globalisation and have not taken action to protect their citizens from it.
> 
> Big corporations have been making profits and sacking staff at the same time. The circulation of money is broken. The only politician who seems to recognise this (in his charmingly naive way) is <gulp> Donald Trump.



As smurf has already said, this event could well be the wakeup call needed, the World of globalisation may well have run its course.
The reality of losing the ability to feed and cloth your own people, may actually overturn the need to find the cheapest place to make stuff, it just shows how little it matters what it costs to make something if you can't get it.
Maybe the foreign investment revue board will have more teeth soon?


----------



## wayneL

SirRumpole said:


> Yes I think the market was definitely overvalued, driven up by cheap money as bas said and the fact that people can't get a good return from the banks. It wasn't representative of the real global economy which has been tanking for some time. Do don't keep cutting interest rates in a healthy economy do you ?
> 
> Why the global economy is tanking is the real question.
> 
> I reckon it can be laid at the feet of globalisation and the way it's been managed by the corporations and governments.
> 
> Industries have been transferred to Third World Countries, but employees there aren't paid much more than slaves. The consuming power of the First World has been decimated by the loss of jobs due to the transfer of industry and mechanisation/automation of many industries. Governments haven't realised the side effects of globalisation and have not taken action to protect their citizens from it.
> 
> Big corporations have been making profits and sacking staff at the same time. The circulation of money is broken. The only politician who seems to recognise this (in his charmingly naive way) is <gulp> Donald Trump.




I want to excise the last sentence. Even if I agree with that point, I want to completely separate from the rest of what you said here.
*****
Bang.
On.


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## basilio

I tell ya its a madhouse on the exchange.
Day starts with all ords *down 200 *points.  Like wow.  
Two hours later and it is *up 100 points. 
*
Anyway here made a buck on the way ?


----------



## wayneL

basilio said:


> I tell ya its a madhouse on the exchange.
> Day starts with all ords *down 200 *points.  Like wow.
> Two hours later and it is *up 100 points.
> *
> Anyway here made a buck on the way ?



Extreme volatility is a b**** to trade, good luck with that!

Fishing stories abound.


----------



## SirRumpole

basilio said:


> I tell ya its a madhouse on the exchange.
> Day starts with all ords *down 200 *points.  Like wow.
> Two hours later and it is *up 100 points.
> *
> Anyway here made a buck on the way ?




Just shows most people have no frigging idea what is happening.


----------

