WHY CHAOS THEORY IS SO IMPORTANT.

“The organisation of the Universe demands that matters abandon itself to the games of
chance.”

H. Reeves - Atoms of Science
The theory of chaos is not a theory to help you make investment decisions, its usefulness lies
in the greater understanding it gives us of the trading environment and how we should cope
with it.

1. It shows us how human psychology influences price movement, why trends occur, and
how they can end up being understood in terms of probability. The herd mentality is fully
explained in our Special Situations Report available from the office. Human psychology has
remained constant over time, and it is this fact that helps us predict the probability of price
movement via technical analysis.

2. It disproves Random Walk theory; although market movements may appear random, under
statistical tests they are not.

3. If it disproves that the markets are random, it also shows why the quest for the “Holy
Grail” computerised or mechanical trading system is doomed to failure. It also confronts
those disciples of such analysts as Gann and Elliott who believe the Universe is ruled by law.

4. It helps us to operate in an unstructured environment by giving us a greater understanding
of it. The best you can do is understand the original conditions that give rise to probable
future events, and act accordingly. This may sound disheartening, it is not. By understanding
chaos, you will be able to keep the odds firmly in your favour. If you can do that, you will
end up making a lot of money from your trading, year in year out.