The understanding of the Lorenz Attractor shows the deep simplicity of the complexity, on condition that it’s understood scientifically.
In order to better understand it, we start with the chart below of a single phenomenon over time: as you can see, it has an absolutely unintelligible and unpredictable behavior, as the stocks you know!
Now, if we observe the combination of two different phenomena in subsequent moments instead of a single phenomenon over time..
a graceful “butterfly” appears and brings us from the unintelligible unpredictability of the first chart to the simple logic of this one, so:
- while a phenomenon is measured by the horizontal line, the vertical line measures the second phenomenon linked to the first one, as the temperature and the pressure in meteorology, or the price and the volume in finance.
- Every point indicates a specific value combination of these two phenomena in subsequent moments;
- After several moments, several different trends emerge associated to two attractors;
- Those attractors represent inevitable breakthrough points of the always different and unpredictable trajectories.
This is a fundamental principle of complex phenomena, i.e. they are absolutely unpredictable, but… and this is the exciting part of Physical Analysis: every single trajectory, as soon as it departs from an attractor, will certainly and predictably go towards the other one.
So, the question is: are the financial phenomena predictable or unpredictable?
The Complexity Theory answer is simple: the complex phenomena are structurally unpredictable, but they have some predictable ranges exclusively between subsequent attractors.
The Scientific Trader has to learn how to see the stock’s attractors.
Let's see how:
- First of all it’s necessary to detect the discontinuity of the volumes (there are only three types of them), as per this clear isolated peak you can see in this example;
- Once detected the discontinuity, the definition of the related attractor is univocal;
- So, we start observing the prices behavior around the Attractor, recording the possible interactions among them with only 9 different behavioral symbols.
- So, reading the prices behavior around the attractors becomes easy to automate, as you can see in this good example of 4 bounces exactly on the attractor;
- It clearly shows the opportunity of a short trade!
The target of Physical Analysis is to see stock attractors, in order to scientifically “ride” every subsequent range of predictability.
Seeing the attractors is also essential for understanding volatility behavior, moment by moment. The investment becomes more scientific, and investors can reduce random and gambling investments. Our psycho-physical system, and our wellness (not only economical) will benefit from it.