The markets are Chaos...and Order

[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

 

[Gringotts Bank]

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]

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]

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]

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]

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]

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]

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]

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]

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.

 

[motorway]

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, Müller and the rest of the team were really interested in was that which would measure time.

One of the reasons that physicists like Müller 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]

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