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CHAOS AND OUR PERSONAL WORLD
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We humans have a habit of misnaming our most important concerns and tools. For example, what we call our "conscious" mind (left hemisphere) is the only part of our brain that ever goes "unconscious" or sleeps. The other parts of our brain work continuously without a break. Similarly, physicists have chosen to call this new science chaos, a term that is fundamen­tally misleading.

Chaos does not refer to randomness; just the opposite is true. Chaos is a higher form of order where randomness and stimuli become the organizing principle rather than the more traditional "cause and effect" in the Newtonian/Euclidean sense. Because both nature and the human brain are chaotic, the markets, as a part of nature and a reflection of human nature, are chaotic as well. It is time to recognize that our standard education gives traders the wrong impression and the wrong logic maps. No matter how elaborate linear mathematics gets, with its Fourier transforms, orthogonal functions, regression techniques, artificial intelligence, neural networks, genetic algorithms, and so on, it inevitably misleads traders about their overwhelmingly nonlinear markets. The markets are con­noisseurs of chaos.

The

normal

distribution

stands out in the

experience of humankind

as one of the broadest generalizations

of natural science. It has been used as a

trading instrument in the markets, in the physical

and social sciences, and in medicine, agriculture, and

engineering. It is an indispensable tool for the analysis and

the interpretation of the basic data gathered by observation.

The structure of the previous three sentences represents the Gaussian or normal distribution curve. It makes a statement about the nature of randomness. But as a means of finding one's way through the wilderness of trading, this standard leaves much to be desired. As Nobel laureate Wassily Leontief put it, "In no field of empirical inquiry has so massive and sophisticated a statistical machinery been used with such indifferent results" (quoted in Gleick, 1987, p. 84).

Commodity prices simply do not fit the bell-shaped model. They do, however, make some configurations that look amazingly like figures in other places such as shorelines and riverbeds. Benoit Mandelbrot, at the IBM research center at Yorktown Heights, New York, worked with masses of cotton price data. He was looking for some common parameters between nature and human behavior. He found that numbers producing aberrations from the point of view of normal distribution produced symmetry from the point of view of scaling. "Each particular price change was random and unpredictable. But the sequence of changes was independent of scale: curves for the daily and monthly price changes matched perfectly. Incredibly, analyzed Mandelbrot's way, the degree of variation had remained constant over a tumultuous sixty-year period that saw two World Wars and a depression" (Gleick, 1987, p. 86).

Chaos is not new, it has been around since before time and humankind. We are the products of chaos, not the inventors of it. Chaos is what got us here and chaos will take us further into the future. Even in our brain, one part (left hemisphere) is looking for stability and another part (right hemisphere) is looking for chaos. We (self, body, personality, and all) have developed on that tricky interface between stability and chaos.

Chaos is the meeting ground between yin/yang, black/white, here/there, now/then, or our development. In shaman terms, it is the tonal and the nagel. In markets, it is choppy versus trending. In trader's behavior, it is winning and losing. It is sleeping and waking, planting and harvesting.

Figure 3-1 shows the transformation from linear flow to nonlinear or turbulent flow. In Figure 3-1 (a), the stream is moving in a very stable fashion and is quite predictable. Figure 3-l(b) shows more water running; turbulence is beginning to build up behind the rock. Add more water (energy in the form of rain and gravity), and the turbulence increases and there is less predictability in the stream (Figure 3-l(c) and (d)).

Our brain also develops different behavior, depending on the flow of energy. It is sometimes stable, like the stream in Figure 3-l(a). When trading the market, it is often turbulent, like the stream in Figure 3-l(d).

Since Aristotle's time, we have spent much more time educating and using the stable (left hemisphere linear) part rather than the chaos (right hemisphere nonlinear) part of our brain. According to our current linear logic map, "truth" lies in stability or never-changing knowledge, so there is little benefit in developing a strategy for dealing with or using chaos.

Nonlinear logic makes it obvious that stability is temporary and chaos is forever. Over the past 10 years, millions of dollars have been "thrown" at the concept of chaos in attempts to, first, make sense of the markets, and second, profit from that knowledge. Research has made an effort to better understand chaos and the interaction between the mass of traders and the market itself. Our research finds that the Chaos of our minds is reflected in the market. Both are an elaborate mixture of Chaos and stability. Prigogine has written: "The brain is a creature of chaos, a far from equilibrium soup simmering on an uneven flame of daily life" (Prigogine and Stengers, I., 1984, p. 48).

Stability and chaos are also described as linear and nonlinear activity, whether that activity involves growing, producing, reproducing, or even just thinking. If we were to create the world from our left hemisphere perspective, we would have straight rivers, round clouds, and cone-shaped mountains. Nature, however, had other forces. Our natural world came from nonlinear sources. Man-made products such as language came from the left hemisphere and consequently are digital and lin­ear. We have created our trading systems in the same way we created language, and just as language is not successful in describing nature, so linear trading systems are unsuccessful in describing and capturing profits from the market. Remember, chaos got us here and chaos will take us where we want to go.

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