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Chaos Theory

The sky is the limit for traders when it comes to financial speculations. They either use casino methods or neglect risk management. Sometimes they delve into mathematics in search for patterns in the obviously chaotic behaviour of the market. Wherever the knowledge path turns, it always leads to new discoveries.

Bill Williams can be considered the founder of the Chaos Theory. He was the first who suggested using fractals in trading. The fractals are some geometrical formations the main feature of which is self-similarity, i.e. a large-scale structure is formed from smaller elements. This structure repeats the form of the smaller formations. The theory says that this is the particular property that lies at the basis of all the natural elements, from the river bed to the cells of the human brain.

How can fractals be useful in trading?! You can notice very often that some of the patterns on the charts appear with surprising regularity in large and smaller proportions. In this way, it can be concluded that the market repeats its movements after a while similar to already existing elements. If you determine these figures, then the forecasts can be more accurate, and, therefore, used at your own discretion. Bill Williams suggested defining a Forex fractal as several candles, one of which will be a local low or high in the given time frame. For simplicity's sake, he developed an indicator that became very popular. These days, it is said to be a standard tool for the MetaTrader4 trading platform.

Today, the Chaos Theory has developed into a new form that is quite far from the initial idea of Bill Williams. However, the main point remained the same - the search for the self-similar patterns on the charts to predict price movement. Within the modern Fractal Theory, traders are not looking for the fractals, but monads, the formations that are bigger than five-six candles based on self-similarity. Besides, the Mirror Market Theory, the branch of the Fractal Theory, went even further claiming that the market mirrors itself upon reaching certain points. Examples provided by the market are amazing. It is surprising how accurate the forecast built on this theory can be. Moreover, the supporters of the mirror markets say that even unpredictable events of a fundamental nature have already been taken into account by the market. A typical example is the terrorist attack in London: the currency chart did not show any technical background for a spike, but prior to this, the mirror indicators pointed to a strong impulse.


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