Trend or Range and beyond it: Market state analysis
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Chart patterns or Chaos attractors?
Can we analyse the chart patterns as chaotic attractors?
Sensitivity to initial conditions means that each point in such a system is arbitrarily closely approximated by other points with significantly different future trajectories. Thus, an arbitrarily small perturbation of the current trajectory may lead to significantly different future behavior.
In practice a powerful spike even it is corrected will influence the future price action and will set a new set of solutions. If a spike modifies the current phase space (current volatility) it is a signal that the system will be perturbed.
In practice we can analyze the beginning and the end of the market periods.
So we can analyze the price action as chaotic attractors in a particular phase space. What is important to know when a powerful shift in the structure occurs. We cannot know how, when, and why and that cannot be predicted. You can analyze that by your experience or you can use an algorithm (like this which is posted on this blog).
The most common errors that is made by the technicians is when a powerful shift in the structure occurs they try to use a pattern that was in force before.
That is a point when the complex neural net models fail, because they are used for a structure that is not anymore valid and a new structure is about to emerge.
This is just a theory guys and gals. But the calculation of the Hurst exponent showed a clear long term process in the markets. The lyapunov exponents calculations showed that even sometimes the processes are really not dissipative.
Comments
When I think about the chaos attractors I think that chaos attractors can be found in the accumulation of market orders. Those orders act as point attractors for some big market players.
This is closely related with the group about Oanda market orders information.
The idea is that the attractors are not only in the price itself but also in the market as accumulation of open orders. The idea is that to look only the price is a reductionist approach, the market orders are a part of the price.
And to say that the accumulation of market orders acts as a chaotic attroctor for the price fits well, even if it is not scientifically proved, and of course it is not a science, however all the applications of mathematical methods in finance is not science at all (otherwise we would not have crisis of any kind).
Consider it as a hypothesis not even a tentative theory.
When I did some tests with Support Vector Machine model. On one model I applied the price alone, on another I applied the levels of market orders accumulation and how they change. The second level performed much better.
Unfortunately I did not made any extensive testing because it is too much work to input those levels by hand and to input them into excel spread sheets in order to feed the rapid miner model. And I doubted too much of the relevance of the results.
As for chart patterns and chaos attractors I updated the following post. It is about
Accumulation of orders: accumulation and distribution between market participants and market makers in the Forex market.
The hypothesis is a somewhat extension of the principles of the VSA (Volume Spread Analysis) in the modern markets where the big institutional volume is not a king anymore.
The smart algorythms are trying to front run the big isntitutional volume, to that extent that it is using super fast algorythms itself to place the orders without revealing the direction (or even is using dark pools).
So the accumulation of open orders is a case of attraction point for some market participants. With those levels you can even project beforehand the support and resistance zones.
An extension of those ideas are the shots between the relationship of the market orders accumulation acting as chaos attractors and the market state characterized by the volatility and and fractal dimension.
This stuff is interesting, because you can see how the market participants are responding to the market and placing orders at specific spots (not randomly). Especially in EURUSD it is very pronounces with accumulation of orders at the round numbers acting as chaos attractors.