Making Money With Chaos by Hans Hannula, Ph.D., RSA, CTA
An order indeed exists in the market, as W.D. Gann and, more recently, J. Welles Wilder have claimed. But the order is not as perfect as some have made it out to be, simply because the market obeys the physical laws of a chaotic system. The purpose of this article is to explain the basic behavior of chaotic systems and to show you how to profit by them.
Since the publication of the popular book, Chaos, the Making of a New Science, many have tried to apply those theories to the markets. Profitable application of theory, however, requires a practical feel for the phenomenon you are studying. So let's start with basics.
Chaos theory was developed by scientists and mathematicians to describe the behavior of nonlinear systems. It has been found to describe real physical systems from waterwheels to heart attacks. So what's a nonlinear system? Well, a nonlinear system is one that is not straight. What linear means is that the input-output relationship of the system is a straight line. If you go out and press down on your car bumper, with 10 pounds of force the bumper might move one inch; with 20 pounds of push the bumper may move two inches. The distance moved is proportional to the force applied.