For those who follow me for the past year, it is almost crystal clear that I do not believe in Random walk theory..!
However, It does not mean that I believe all market moves are predictable!
The stock market is a chaotic system, and follows the chaos theorem principles!
Now let's look at Chaos theory and its principles..!
What is Chaos Theory?
Chaos is the science of surprises, of the nonlinear and the unpredictable. It teaches us to expect the unexpected. While most traditional science deals with supposedly predictable phenomena like gravity, electricity, or chemical reactions, Chaos Theory deals with nonlinear things that are effectively impossible to predict or control, like turbulence, weather, the stock market, our brain states, and so on. These phenomena are often described by fractal mathematics, which captures the infinite complexity of nature. Many natural objects exhibit fractal properties, including landscapes, clouds, trees, organs, rivers, etc, and many of the systems in which we live exhibit complex, chaotic behavior. Recognizing the chaotic, fractal nature of our world can give us new insight, power, and wisdom. For example, by understanding the complex, chaotic dynamics of the atmosphere, a balloon pilot can “steer” a balloon to the desired location. By understanding that our ecosystems, our social systems, and our economic systems are interconnected, we can hope to avoid actions that may end up being detrimental to our long-term well-being.
Don't blame me!
Principles of Chaos
The Butterfly Effect: This effect grants the power to cause a hurricane in China to a butterfly flapping its wings in New Mexico. It may take a very long time, but the connection is real. If the butterfly had not flapped its wings at just the right point in space/time, the hurricane would not have happened. A more rigorous way to express this is that small changes in the initial conditions lead to drastic changes in the results. Our lives are an ongoing demonstration of this principle. Who knows what the long-term effects of teaching millions of kids about chaos and fractals will be?
Unpredictability: Because we can never know all the initial conditions of a complex system in sufficient (i.e. perfect) detail, we cannot hope to predict the ultimate fate of a complex system. Even slight errors in measuring the state of a system will be amplified dramatically, rendering any prediction useless. Since it is impossible to measure the effects of all the butterflies (etc) in the World, accurate long-range weather prediction will always remain impossible.
Order / Disorder Chaos is not simply disordered. Chaos explores the transitions between order and disorder, which often occur in surprising ways.
Mixing: Turbulence ensures that two adjacent points in a complex system will eventually end up in very different positions after some time has elapsed. Examples: Two neighboring water molecules may end up in different parts of the ocean or even in different oceans. A group of helium balloons that launch together will eventually land in drastically different places. Mixing is thorough because turbulence occurs at all scales. It is also nonlinear: fluids cannot be unmixed.
Feedback: Systems often become chaotic when there is feedback present. A good example is the behavior of the stock market. As the value of a stock rises or falls, people are inclined to buy or sell that stock. This in turn further affects the price of the stock, causing it to rise or fall chaotically.
Fractals: A fractal is a never-ending pattern. Fractals are infinitely complex patterns that are self-similar across different scales. They are created by repeating a simple process over and over in an ongoing feedback loop. Driven by recursion, fractals are images of dynamic systems – the pictures of Chaos. Geometrically, they exist in between our familiar dimensions. Fractal patterns are extremely familiar since nature is full of fractals. For instance: trees, rivers, coastlines, mountains, clouds, seashells, hurricanes, etc.
What Is the Random Walk Theory?
Random walk theory suggests that changes in stock prices have the same distribution and are independent of each other. Therefore, it assumes the past movement or trend of a stock price or market cannot be used to predict its future movement. In short, the random walk theory proclaims that stocks take a random and unpredictable path that makes all methods of predicting stock prices futile in the long run.(Investopedia)
Why it is important to know the difference between Randomness and chaotic behavior?
When the First 2 squeezes happened, I asked myself if there will be another squeeze in the future..!
By monitoring the pattern of the behavior of the Meme Stocks and Wall Street Bets, I noticed there are connections between these moves, such as:
-Most of them have relatively high short interest
Then I asked myself if there is a possible time that the squeeze phenomenon has a higher chance of happening?
I found this squeeze behavior has a higher chance of happening just a few weeks before the Quadruple witching phenomenon!!!
Dear Prof. Malkiel,
Your book A RANDOM WALK. DOWN WALL STREET is based on your observation of randomness in the markets, yet there is a transitory phase between these randomnesses that made tons of money to mathematicians like Jim Simons and Edward Thorp.
Jim Simons:
"Efficient market theory is correct in that there are no gross inefficiencies. But we look at anomalies that may be small in size and brief in time. We make our forecast. Then, shortly thereafter, we re-evaluate the situation and revise our forecast and our portfolio. We do this all day long. We're always in and out and out and in. So we're dependent on activity to make money."
Please, Check this watchlist I published on October 29th, and see how many of these 50 stocks have moved more than 10% in the past 3 days!
https://www.tradingview.com/watchlists/57513728/
just a few examples:
Best,
Moshkelgosha
Reference Articles:
https://fractalfoundation.org/resources/what-is-chaos-theory/
https://www.investopedia.com/terms/r/randomwalktheory.asp
However, It does not mean that I believe all market moves are predictable!
The stock market is a chaotic system, and follows the chaos theorem principles!
Now let's look at Chaos theory and its principles..!
What is Chaos Theory?
Chaos is the science of surprises, of the nonlinear and the unpredictable. It teaches us to expect the unexpected. While most traditional science deals with supposedly predictable phenomena like gravity, electricity, or chemical reactions, Chaos Theory deals with nonlinear things that are effectively impossible to predict or control, like turbulence, weather, the stock market, our brain states, and so on. These phenomena are often described by fractal mathematics, which captures the infinite complexity of nature. Many natural objects exhibit fractal properties, including landscapes, clouds, trees, organs, rivers, etc, and many of the systems in which we live exhibit complex, chaotic behavior. Recognizing the chaotic, fractal nature of our world can give us new insight, power, and wisdom. For example, by understanding the complex, chaotic dynamics of the atmosphere, a balloon pilot can “steer” a balloon to the desired location. By understanding that our ecosystems, our social systems, and our economic systems are interconnected, we can hope to avoid actions that may end up being detrimental to our long-term well-being.
Don't blame me!
Principles of Chaos
The Butterfly Effect: This effect grants the power to cause a hurricane in China to a butterfly flapping its wings in New Mexico. It may take a very long time, but the connection is real. If the butterfly had not flapped its wings at just the right point in space/time, the hurricane would not have happened. A more rigorous way to express this is that small changes in the initial conditions lead to drastic changes in the results. Our lives are an ongoing demonstration of this principle. Who knows what the long-term effects of teaching millions of kids about chaos and fractals will be?
Unpredictability: Because we can never know all the initial conditions of a complex system in sufficient (i.e. perfect) detail, we cannot hope to predict the ultimate fate of a complex system. Even slight errors in measuring the state of a system will be amplified dramatically, rendering any prediction useless. Since it is impossible to measure the effects of all the butterflies (etc) in the World, accurate long-range weather prediction will always remain impossible.
Order / Disorder Chaos is not simply disordered. Chaos explores the transitions between order and disorder, which often occur in surprising ways.
Mixing: Turbulence ensures that two adjacent points in a complex system will eventually end up in very different positions after some time has elapsed. Examples: Two neighboring water molecules may end up in different parts of the ocean or even in different oceans. A group of helium balloons that launch together will eventually land in drastically different places. Mixing is thorough because turbulence occurs at all scales. It is also nonlinear: fluids cannot be unmixed.
Feedback: Systems often become chaotic when there is feedback present. A good example is the behavior of the stock market. As the value of a stock rises or falls, people are inclined to buy or sell that stock. This in turn further affects the price of the stock, causing it to rise or fall chaotically.
Fractals: A fractal is a never-ending pattern. Fractals are infinitely complex patterns that are self-similar across different scales. They are created by repeating a simple process over and over in an ongoing feedback loop. Driven by recursion, fractals are images of dynamic systems – the pictures of Chaos. Geometrically, they exist in between our familiar dimensions. Fractal patterns are extremely familiar since nature is full of fractals. For instance: trees, rivers, coastlines, mountains, clouds, seashells, hurricanes, etc.
What Is the Random Walk Theory?
Random walk theory suggests that changes in stock prices have the same distribution and are independent of each other. Therefore, it assumes the past movement or trend of a stock price or market cannot be used to predict its future movement. In short, the random walk theory proclaims that stocks take a random and unpredictable path that makes all methods of predicting stock prices futile in the long run.(Investopedia)
Why it is important to know the difference between Randomness and chaotic behavior?
When the First 2 squeezes happened, I asked myself if there will be another squeeze in the future..!
By monitoring the pattern of the behavior of the Meme Stocks and Wall Street Bets, I noticed there are connections between these moves, such as:
-Most of them have relatively high short interest
Then I asked myself if there is a possible time that the squeeze phenomenon has a higher chance of happening?
I found this squeeze behavior has a higher chance of happening just a few weeks before the Quadruple witching phenomenon!!!
Dear Prof. Malkiel,
Your book A RANDOM WALK. DOWN WALL STREET is based on your observation of randomness in the markets, yet there is a transitory phase between these randomnesses that made tons of money to mathematicians like Jim Simons and Edward Thorp.
Jim Simons:
"Efficient market theory is correct in that there are no gross inefficiencies. But we look at anomalies that may be small in size and brief in time. We make our forecast. Then, shortly thereafter, we re-evaluate the situation and revise our forecast and our portfolio. We do this all day long. We're always in and out and out and in. So we're dependent on activity to make money."
Please, Check this watchlist I published on October 29th, and see how many of these 50 stocks have moved more than 10% in the past 3 days!
https://www.tradingview.com/watchlists/57513728/
just a few examples:
Best,
Moshkelgosha
Reference Articles:
https://fractalfoundation.org/resources/what-is-chaos-theory/
https://www.investopedia.com/terms/r/randomwalktheory.asp
Comment:
The Yellow numbers are WSB rank of highest mentioned today!