Can market follows a deterministic mathematical law ?

Discussion in 'Trading' started by harrytrader, Sep 23, 2003.

  1. (for links to some references to work go to

    In the scenario of Pi the movie "Maximillian Cohen believes that mathematics is the true language of nature, and that every action in the world, no matter how random, is intricately ordered and patterned. Given this thesis, why not use this knowledge to try to predict the stock market?". This is only fiction that is based on pure Mysticism of some Natural Order abusively generalised to Human Activities Order - as Nature and Humans are generally antinomic it is abusive to pretend so without other justifications. What about reality (see Plato's allegory of the Cave) ? As has observed J. Doine Farmer - from Santa Fe Institute - "I have been struck recently by the disconnect between the worldview expressed by these economic and finance papers, and the view that I was seeing by standing on trading floors and talking with investment professionals. Some professionals believe completely in technical indicators (see dictionary of technical analysis), while others believe that only fundamentals matter." Those who use technical indicators - like moving averages, macd and other stochastic indicators - belong to so called technical analysts . But a huge number of technical analysts also use trendlines, channels, fibonacci ratios and above all ordered complex patterns - classical head & shoulders, cup & handle or among most sophisticated ones, Gartley and so-like patterns or whole theories like Dow Theory, elliott waves theory or gann theory - which appear as mostly esoteric to fundamentalists and economists and even to the first category of technical analysts who use technical indicators alone. These esoteric approaches have been used for a long time for commodities (originally agricultural) market and continue to be used intensively in all highly speculative derivatives market (see CBOT exchange online seminars) where precision is much more needed than traditional stocks market due to their inherent fantastic leverage. Are they wrong and follow irrational methods ? Can these esoteric approaches can have a more rational explanation than Mysticism ? With such more rational approach can we expect better forecasts than these traditional techniques ? Our quantitative model which was derived from a pure rational econometric approach of a special kind of supplies and demands unexpectedly found the missing link between fundamental economic modelisation and these esoteric approaches that no one until today was able to justify without refering to weird explanations that are unacceptable from scientific point of view that's why academics, if they finally recognise the role of psychology in stock market, give to these methods no other justification than auto-realisation of pure fads.

    In our theory market follows a path that ressembles a "string" - see Central Concept below - so "string" is more profound reality than "waves", in the sense of Elliottists or Mandelbrott's description of market's fractals . So waves are only appearances under a more concrete but degraded point of view (as if one only sees three dimensions whereas one of the most advanced theory in Physics that unifies Quantum Theory with Einstein's Relativity - which coïncidently is also called Super String Theory (see the official site) - thinks that our Universe can have at least 10 dimensions. This is just a funny but not perfect analogy since we don't have the equivalent of such dimensions in our string theory). This string model - which is based on a pure set of differential equations - doesn't include any golden or fibonacci ratios (used by Elliottists) neither in structure or coefficients, nevertheless we have these ratios appear spontaneously - as artefacts - at outputs. This is due to mathematical property of the whole fractal structure and not due to omnisciency of crowd (which scientists have most difficulties to believe in) as pretended by Elliottists or more rationally due only to auto-realisation of psychological fads as supposed by some economists researchers - notably economists from the latest behavorial school - as they can't find another reasonable explanation - we don't say that psychology doesn't play any role, we say that the traditional explanation commits the classical error of confounding cause and effect: crowd's psychology cannot be the primary or pure cause of market's action as we will see at the end, one of the first reason is that this kind of explanation adds even more paradoxes and contradictions to the already existing ones without it and quantitatively their models have relatively poor results since they are rather descriptive and qualitative type models whereas our model is a causal and quantitative type model. We didn't also accept the arguments of some technical analysts who advanced some mystical power of brains and intervention of astrological configurations in the sky - at least, to make no offense to some traders's beliefs, since we know that many among them believe in moon effect on stock market (see for example Benner cycles and eclipse cycles) - we would say that we didn't need them to create our model :).

    Traders and economists know that the Stock Market's behavior is complex and normally impossible to forecast - especially tops and bottoms which generally follow more complex non normal laws than the mean. A vast group of Technical Analysts use trendlines and fibonacci ratios to make some forecasts but their approach lead to much skepticism from scientists and fundamentalists (see for example farmer's article). As for us we have discovered that Technical Analysts who see trendlines, elliott waves or Gann lines are not totally dreaming nevertheless they are like the prisoners in Plato's cavern allegory: they only see parts of the world that are apparent whereas what they see are only shadows of a reality that is richer than suspected. This reality is not composed of straight lines but of curves which intersects at some contact points (attractors in chaos theory) between the apparent world - one can see without effort - and the hidden world - one can abstract but not obviously . Above all what was considered as noise or rather uncertainty is totally removed. Uncertainty is different from noise as it concerns the irreductable part of model structure that one thinks could not (temporarily) be forecasted fondamentally, like spikes at opening or on globex - but this can be only due to limitation of paradigm - see its role in scientific discovery by historian of Science Thomas Kuhn - and / or yet unknown form of expression. This would seem astonishing and even impossible - since one could think that with so many diverse agents opinions one cannot get any deductive and deterministic model as John L. Casti underlines in his <a href="" target="_blank">article below</a> - if the accuracy of our forecast every day wasn't shaking us that it is really "true". What John L. Casti says is in fact common sense and rational thinking no one - including us - can dispute but it is so only within the paradigm that the market is really driven (caused) by the crowd (agents). We have made the hypothesis - see Poincaré on the role of hypothesis in Science - that this paradigm is false and elaborated our model upon an other paradigm and the results of our forecast everyday proved to us that our hypothesis was justified. At least one can consider that it is an enlargement of actual paradigm which is not only theorical but has concrete results applicable for most challenging trading activities: futures daytrading our model has been specialised for but it is not exclusive to Dow Jones. It is in truth a "universal" model in the sense that it can be applicable to any market indices or stocks without any optimisation process at all - this in fact proves its robustness and above all its scientific validity more in principle than even the statistical accuracy of the forecasts. The way the model has been designed was from using pure abstract concepts and causalities chains (deductive/inductive approach - see Poincaré again) based on our knowledge of market and not involving real market's datas (no use of any statistical correlation model for example). The probability that we obtain results consistent with realities by chance is so reduced virtually to zero. Scientists distinguish between white box model (causal modelisation) and black box model (stochastic approach using statistical correlation) our model belongs to the first class : it is a pure deterministic non-linear causal and rational model described by differential equations using no noise modelisation but rational and causal econometric approach: contrary to overwhelming current paradigm market's behavior is neither dictated by the crowd's psychology nor irrationally directed. If it was the irrational crowd that directed the market's behavior it wouldn't possible that market stopped at our unique theorical top or bottom calculated by our model especially when this occurs during the very volatile opening or the very illiquid globex session (in fact one cannot say that globex has much crowd) since even technical analysts never agree between them how could the crowd supposedly do so ? This is just a question of logic that there is more than paradox in traditional explanation : there is even contradiction. Paradox can be, contradiction cannot : it can only be eliminated. So the explanation is elsewhere but we will let our readers think about this on their own :).
  2. The market follows all kinds of laws.

    Thing is, most or all of them are quite simple and elegant.

    Dense paragraphs with denser writing are like the systems with 378 rules, they bog down in thier own complexity.

  3. Are there cliffnotes for this? :D
  4. Cheese


    The market, say trading the Dow index, poses a problem: to make a profit but preferably to build a quick fortune if you can do it. This stands alone .. and is only a 'problem solving' question.

    What the human brain does above all else (and allegedly the male brain is best at this) is solve problems it wants to solve.
    So this is not philosophy or anything other than a task. By extension it will almost certainly entail use of knowledge and experience.

    So it is as simple as we should make it .. because the brain solves through the process of arriving at the simplest solution. By elimination it will move to a less simple solution if it does not arrive at a solution by the simplest means and understanding.

    Now I suggest success in the market is simple .. but I am not saying it is easily or simply achieved; no, I am not. The key is asking the relevant questions and getting the relevant information that you need. Move to solving attempts and testing.

    I can't crack the shell of this nut with my teeth but I will now pick up a rock from the forest floor and tap the shell. Yes, that works! Look with satisfaction at lovely released nut. Eat nut.

    Repeat. Do so until you run out of nuts (ie the markets are closed forever or the SEC starts investigating your phenomenal success) or you are no longer hungary (ie you've now accumulated more money than Bill Gates).
  5. LOL! No kidding! I thought I wrote long posts...sheeshhh...



  6. Didn't W.D. Gann prove markets are mathematical with his square-of-nines, etc.? Other off the world math theories, William T. Erman: and

  7. yes. thank you for posting the link to bill erman. tudor jones's chief technician speaks very very highly of erman .

    all the best,

    surfer:) :)
  8. I chose that as a starting point long ago. Things worked out fine. Boolean Algebra seems to be best maths.

    The market turned out to be a synthesis of three levels. By taking thme apart and deling form general to specific and never mixing levels, it turns out to be uncomplicated.

    I stay on the detailed lowest level until I have to go up the line to reestablish my perspective.

    Seems to work continually using boolean expressions which are very ammenable to software programming
  10. man


    goedel? heard about him? from my understanding it is hard to claim in the post goedel world, that mathematics is able to fully describe nature - and what else could a phrase: "is the language of nature" mean?

    mathematics is as much a language of nature as any other attempt of consciousness to grasp aspects of existence.

    anything beyond is well-sounding promotion ...

    #10     Sep 24, 2003