Trading Chaos. Bill M. Williams

DEDICATION
This book is dedicated to my beloved Ellen. She convinced me to write it, helped shape it, and participated in research with me. Without her support, I would have left trading much earlier than it became a profitable enough business. If not for her, I would have left this activity and gone in search of a "real" job, and would have deprived myself of all those invaluable advantages and wonderful opportunities that this rewarding occupation and the very lifestyle of an independent speculator provides in abundance. This book would not have been possible without her. Thank you Ellen!

FOREWORD

If we do not change our direction, then we will most likely return to where we started.

Chinese proverb.

The terrible truth is that 90 percent of all traders constantly lose money. About 5-7 percent have occasional successes and only 3-5 percent actually make money regularly. This truth is all the more striking against the background of these two factors:

1) High level of intelligence: according to tests to determine the intelligence quotient (IQ), traders as a social group are among the 10% of the most intellectually developed professionals.

2) Professional viability: basically, these talented men and women came to exchange trading as professionally accomplished people, that is, having already made a career and / or succeeded in their own business. In all likelihood, you also belong to this intellectual elite and have already achieved a lot in life. Otherwise, you would not be reading this preface. Perhaps you have already tried your hand at trading and know how difficult it is. Or maybe you are just going to do stock trading. Be that as it may, if you can solve the mystery of why nine out of ten of these talented, extraordinary people with such a high level of intelligence are constantly incurring losses, you will discover new, unlimited opportunities for profit.

The question immediately arises: are you ready to abandon the artificial tricks of technical analysis and learn to skillfully use more "natural" methods? This book will show you a simple and clear way to solve this riddle so that you can regularly make a profit when trading on exchange instead of chronically losing money. Why am I so sure of this? Because I have taught over 20,000 traders and 450 privately trained with me, and because all of them are now dedicated to trading the stock market full-time. I myself am a trader with 35" years of successful trading experience. The material for this book has been shaped primarily from my own teaching methods.

The first thing you should not do is act like the majority: the 90 percent who are chronically underperforming in the market. Losers spend too much time reading THE WALL STREET JORNAL and reading books on technical and fundamental research, listening to CNBC-FNN, constantly consulting with their brokers, attending various seminars, buying trading systems, subscribing to newsletters and hotlines. They spend a significant portion of their time on a wildly spinning, non-stop carousel that takes up a lot of time and doesn't give them a chance to look around.

My approach is different from all this. This book will show you an updated scheme and a brand new way to get stable profits in the market. We use the latest scientific achievements in the field of the theory of human behavior and the life of economic systems. This new approach, which I call the "Profitunity" approach, is based on the practical application of chaos theory.

Chaos theory is a new look at the market. It allows us to see the underlying structure that governs the behavior of the market. It also removes the ambiguity that comes from Elliott wave theory predictions.

While chaos (the word is very unfortunate with an accompanying meaning that has ubiquitously replaced its true meaning, but we will discuss this in Chapter 3) is older than human civilization itself, chaos theory has come into practice only after the widespread use of powerful computers.

You don’t need powerful computers to apply chaos theory to trading: supercomputers were needed before and were used to isolate the main structural and behavioral aspects of the markets, which are fundamentally important and still elude the attention of the average trader.

Using the methods of fractal geometry1 - one of the directions of the science of chaos - it is possible for 10 seconds to analyze any market and find out what exactly should be done in it. Many of my students, experienced traders, originally practiced technical analysis; in those days, they needed dozens of days to make a decision: technical analysis took them 6-10 hours a day.

Until recently, most traders and scientists ignored or rejected this taboo subject - this "wrong side" of reality. They preferred to study the good old Newtonian mechanics, they preferred to describe the shapes of planetary orbits with beautiful ellipses. Although these "ideal" models, as we now know, are aberrations of natural processes, it is easy to understand their appeal. Classical physics steadily follows its smooth path.

Chaotic (natural) systems are not so attractive at all: they obey the laws of nonlinear dynamics. These phenomena (phenomena) are confirmed by the presence of complex feedback loops in cyclic systems, the non-periodic occurrence of which cannot be predicted. For example, if one swinging pendulum is pushed against another, the swings of both can become "wildly" erratic. Breakers appear in a similar way: having receded from the pier, the wave meets the resistance of the tide and "collapses". The size of the wave increases or decreases to varying degrees. In the human brain, the electrical impulse of one neuron is equally unpredictably amplified or attenuated under the influence of nerve impulses from connected neurons.

Unexpected government announcements, weather events, reports of crop prospects, political or economic events in countries that affect the world economy lead to a change in the trend in financial markets. Such "shocks" are capable of launching any apparently chaotic system in a new direction that cannot be qualitatively comprehended using linear Newtonian tools.

It seems that such deviations create a completely chaotic world. But, despite the extreme anxiety of scientists, this unmanageable, confusing mess for all of us is not increasing. What begins as a frenzy of erratic impulses (the movement of prices in the markets) eventually takes the form of ghostly geometry: what we call strange attractors.

What is a "strange attractor" and how can a predictable structure emerge from this apparent disorder? Imagine it as an idealized state towards which the system gravitates in an unpredictable way. Such a structure is formed due to the fact that the behavior of the system (market) is only partly a random function. Rather, the system fluctuates randomly within a specific range or norm.

This fact changes the prevailing ideas about chaos: the so-called "terrible disorder", once "eliminated" by classical physics, is in fact the highest form of order.

Remember the famous words of Plato: "Geometry leads the soul to truth"?

So, by transforming market "action" graphs into such abstract structures as strange attractors, one can see the market behavior underlying these actions. This transformation can be compared to an x-ray of a fracture. Only superficial defects are visible to the naked eye; what actually happened in the bone structure cannot be seen without an x-ray. What follows from this? Understanding the laws of chaotic movement is a huge asset that ensures the profitability of stock trading.

As you study the "Profitunity" program, you will understand that profit is not achieved by resisting the market: you just need to dance to the beat of the film. I have spent 25 years fighting the market, receiving income, however, very irregularly; then the study of fractal geometry led me to the understanding that the market is a natural (natural) rather than an artificial (man-made) function.

By understanding and accepting this approach, you will be freed from the "psychological pressure" of stock trading, from this constant tension that drains your nerve cells and devastates your account. By understanding the market, you will be able to control your actions in it, you will be able to better control what is happening between the market and you. And, as during a dance, you need to enjoy the process and then the result will exceed all expectations.

The path to the pinnacle of success is simple - this book will show you. The gradual ascent from beginner to expert is five steps leading to this peak, and on one of them you will find yourself. You will not only understand where you are, but you will also learn what needs to be done to reach higher level.

You will discover a new style of life - your life, the rules of which are set by you. Lives with a great future that you yourself, with a minimum of outside interference and government regulation, choose. A life without a boss, dissatisfied customers, return issues, warehousing, financing, intelligence gathering, messages, staff meetings, health and safety instructions. A life that is not covered by the Federal Social Security Tax Act, that has no sales tax, rent, depreciation, business licenses, and so on. You will become the master of your own present and future. Most people can only dream of such a life.

All this will be possible because you will understand what the traders who are part of the elite group (10%) know, namely:

Markets are a natural phenomenon, and their activity is not subject to the laws of classical physics, parametric statistics or linear mathematics.

Fractal geometry offers a completely new approach to information processing - an approach to the pinnacle of success: regular profits and an independent lifestyle.

Chaos theory helps to realize a very important thing: our ideas about what is