FROMCHAOSTO

COSMOSTOCASH

NEWDIMENSIONSINTRADING

Inthefirstdecadeofthetwentyfirstcentury,
wehaveachoicetoeitherbeapart
ofthelastgenerationoftraders
usinglinear(ineffective)techniques,
orthefirstgenerationusingeffective
nonlinear(chaotic)techniques.
Mypurposesinthischapterare:tointroduceyoutothebasicconceptsofChaosinarelatively
nonscientificmanner,andtopointoutitsapplicabilitytoprofitabletradingandinvesting.WhenIfirst
startedtrading,over40yearsago,theprimaryapproachtounderstandingthemarketswasfundamental
analysis.Poringoverthecompanysfinancialstatements,examiningthecropreports,andgatheringas
much "expert" opinion as could be found were the standard procedures. They did not produce
predictableorprofitableresults,buttheyweretheonlyoptionsifonedidnothaveinsiderinformation.
Through these past four decades, I have seen the personalities of both the stock market and the
commoditymarketschangemanytimes.Actually,theyareinaconstantstateoffluxTheyforman
example of "applied chaos." In the 1970s, very few traders would admit that they used technical
analysis.Inthosedays,technicalanalystswereconsidered"weirdos."Therehasnowbeenacomplete
turnaround.Today,mosttradersareproudtocallthemselvestechnicalanalystsnotbecausetheyhave
beensuccessful,butbecausetheyarefollowingthecrowd.
TECHNICALANALYSISBASICALLYDOESN'TWORK

Theriseofthepersonalcomputer(PC)gavetechnicalanalystsatoolthatallowedthemtoanalyze
immense amounts of data, then curvefit andoptimize the past data to show how they would have
producedenormousprofitsinthepast.Themoretheyoptimizedandcurvefitted,themorethesystems
werepredestinednottoworkinpresenttime.Duringtheearly1980s,hundredsofdifferent"blackbox"
systemsweresoldatpricesaveragingaround$3,000each.Today,notasingleoneofthemisinuse.
Mechanical systems were touted because they "took the emotions out of trading." When technical
analysisdidnotproduceconsistent,predictableprofits,tradersstartedlookinginotherdirections.Oneof
thesedirectionscurrentlyisneuralnetworks.Basically,neuralnetworksdonotchangeanyperspective
paradigmsinthemarkets.They,too,arestillbasedonthefalseassumptionthatthefuturewillbelike
the past. Neural networks do not give us any underlying change in our general paradigms. Neural
networksarereallyonlyveryelaboratecalculators.Theydonottapintotheunderlyingstructureofthe
markets.Therealreasontheseeffortshavenotpaidoffisthatourapproachisbasedonclassicalscience,
whichhasnowbeenproventocontainvitalerrorsinitsapproachtounderstandingthetruenatureof

behavior.Let'sexaminewhathashappenedintoday'sscientificknowledgeanddrawparallelstotrading.
Thenwewilldemonstratehowthisnewapproachcanbeusedinyourpersonaltrading.
PRINCIPLESFROMTHESCIENCEOFCHAOS

The newest science on this planet is the Science of Chaos. In this chapter, we will explore the
generalizedprinciplesderivedfromthisscienceandapplythemtolifeandparticularlytotradingonthe
stockandcommoditymarkets.Aspointedoutearlier,theScienceofChaosdealsprimarilywithnatural
phenomena.OneofMandelbrot'spregnantfindingswasthatthefractaldimensionsofriversaresimilar
tothoseofcommodityandstockmarkets,whichisanindicationthatthemarketsaremoreafunctionof
naturethanaprocessdesignedbythelefthemisphereofthehumanbrain.Ourviewisthateconomics
fundamentalsandtechnical/mechanicalanalysisdonotdrawanaccuratemapofthemarket'sbehavior.
TheScienceofChaosprovidesthreeprimaryprinciplesforthestudyofmarkets.Collectively,these
principlesgovernthebehaviorofenergy.AsdiscussedfullyinRobertFritz'sbook,ThePathofLeast
Resistance,theseprinciplesare:
1.Everythingintheuniversefollowsthepathofleastresistance.Themarketsarelikeariver.Asthey
movethrougheachtradingminute,theytakethepathofleastresistance.That'swhatwealldoyou,
me,themarkets,everythinginnature.Itispartoftheinherentdesignofnature.Whileariverisrunning
downstream,thepathofleastresistancedeterminesitsbehavior.Gravityisenergizingitasitflows
aroundrocksandalongcurvesintheriverbed.Youarereadingthissentenceatthistimebecausethis
wasthepathofleastresistancewhenallyourtimemanagementfactorswereexamined.Youaresitting
whereveryouarebecausethatlocationwasonyourpathofleastresistance.Inthemarket,youwillexit
fromalosingtradewhenthepainoflosingonemoredollarbecomesstrongerthanthepainofsaying
thatyouwerewrongtobeinthetrade.Thepathofleastresistancewillwinagain.
2. The path of least resistance is determined by an always underlying and usually unseen
structure. Thebehaviorofariver,whetheritiscalmlyflowingdownhillorcreatingrapids,
dependsontheunderlyingstructureoftheriverbed.Iftheriverbedisdeepandwide,theriver
willflowcalmlydownhill.Iftheriverbedisshallowandnarrow,theriverbedwillcreate
rapids.Thebehavioroftherivercanbeaccuratelypredictedbyexaminingtheunderlying
riverbed.Ifyoucouldseethebottom,youcouldaccuratelypredictthebehavioroftheriverat
thatpoint.Manytraderswhokeeprepeatingtheirtradingbehaviorproducelosses.Theyoften
feelpowerlessandfrustrated.Theyattendseminars,readbooksandunderlineappropriate
passages,studyNLP(NeuroLinguisticProgramming),have
Fritz,Robert.ThePathofLeastResistance.NewYork:BallantineBooks,1989.
privatesessionswithmarketpsychologists,andthenfindthemselvesbackinthesameold
losingrut.Ifthathashappenedtoyou,yousimplyhaven'tchangedyourunderlyingstructure.
Permanentchangeshappenonlywhenyoualtertheriverbed,theunderlyingstructure.Asa
trader, you always know when you are trying to go against the path of least resistance.
Tensionimmediatelybuildsupinyourbodyandmind.Ifyouaretenseabouttrading,youare
not "floating downtheriver." Once youlearn todetermine theunderlying structure ofa
market,youcanmakepeacewiththebehaviorofthemarketandsimply"floatlikeabutterfly,
stinglikeabee."

3.Thealwaysunderlyingandusuallyunseenstructurecanbediscovered,anditcanbealtered.Youcan
changetheflowofyourlifeandyourtrading.Todothiseasilyandpermanently,youmustworkwith
theunderlyingstructureratherthanthebehaviorproducedbythatunderlyingstructure.
Thebasicconceptderivedfromthesethreeprinciplesisthis:youcanlearntofirstrecognizethe
underlyingstructurethatisdrivingyourtrading,andthenchangeitsothatyoucancreatewhatyou
reallywantfromthemarkets.Structuredeterminesbehavior.Structuredeterminesthewayanything
behavesa bullet, a hurricane, a cab driver, a spouse, a market. The way the pits are structured
determinesthebehaviorofthetradersinthepits.Thestructuresthathavethemostinfluenceonyour
tradingresultsarecomposedofdesires,beliefs,assumptions,and,mostofall,yourunderstandingofthe
underlying structure of the market and yourself. As Robert Fritz notes, "You can't fool Mother
Structure."
SCIENCEISCHANGINGFROMARISTOTLE
TOEINSTEINTOCHAOS

Aspointedoutinthepreviouschapter,classicalsciencebeganaround2,500yearsagoandwasbasedon
Aristotle'sassumptionthattheuniversewassimilartoasmoothlyrunningclock.The"natural"stateof
affairs featured smooth lines, round curves, and pleasingto theeye structures. The unexplained
divergences,considered"random"behavior,wereneglectedasessentiallyunimportant.Thescientific
communityranintounexpectedparadoxesinthestudyofsubatomicparticles.Nothingseemedtoactas
itshould.The"laws"thathadbeenaccurateandpermanentthroughthecenturieswerenowontrial.The
realworldofatomicparticles andtheuniversedidnotfollowthelawsthat,throughthecenturies,
scientists had so painstakingly prescribed. The question was: Do we keep the laws that make us
comfortable,ordoweallowthenewlyobservedbehaviortochangeourviewoftheworld?Whatdowe
dowithallthisnewinformationthatdoesnotfollowourlawsofphysics?WhenJohnStuartBelland
DavidBohmdroppedtheirbombshellsandprovedthateverythingisreallyconnectedtoeverythingelse
andthereisnosingularcauseandeffectrelationship,ourassumptionshadtochange.Theirfindings
limited the scope of classical science to the laboratory. It could not explain turbulence nor living
systems. The question "why?" has become irrelevant. Correlation and coincidences have replaced
causality.Theyprovedwiththousandsofexperimentsthatappearancesofindividuality,includingour
individualbrains,comefromthesame"quantumsoup."Coincidentalwiththechangingofourscientific
paradigmscameinformationtheory,whichpointedoutthatweallliveinparalleluniversesandallour
perceptionsmustpassthroughafilterwhosepurposeistokeepourpersonalparadigmsintact.This
materialiseitherrejectedasbeinginappropriateormassagedtofitourpreviousopinions.Thelatest
additiontothischangingparadigmistheScienceofChaos.
THESCIENCEOFCHAOS:THEHANDLING
OFNEWINFORMATION
TheScienceofChaoshasproventhatmaterialtraditionallyneglectedbyclassicalscienceasbeing
randombehaviorand/orunimportantmeasurementerrorsmaybethemostimportantcausativefactorsin
oursearchforunderstanding.Itpointedlyaddressesareasthatcannotbenavigatedbyclassicalconcepts.

It specifically concentrates on what scientists formerly labeled as Chaos. Chaos is one of those
unfortunatemisnomersthatdescribesmoreofwhatITISNOTthanwhatITIS.Chaosisnotrandom
behavior.Itisamuchhigherformoforder.Insteadofthinkingofyourusualconnotationoftheword
Chaos,substituteinsteadthemoreaccuratedescription:NEWINFORMATION.Fromnowon,every
timeyouhearthewordChaos,translateitinyourmindtonewinformation.

HOWWEHANDLENEWINCOMINGINFORMATION

Theuniversallymostcommonandmostprejudicedwaytohandlenewinformationistofititinto
oldcategories.Wehavedonethissooftenthatweconsideriteitherthenaturalthingtodoor,more
commonly,theONLYwaytohandleit.Uponreceivingnewinformation,ourusualfirstapproachis:
"Whatisitlike?Itremindsmeof...."Accordingtopsychologists,anytimeyoufeeleitheroverwhelmed
orboreditisbecauseyouareattemptingtofitnewinformationintooldcategories.(Aha!Whatareyou
doingwiththisinformationatthismoment?)Thinkaboutthatwhenyouareinthemarketandfeeling
eitherboredoroverwhelmed.Ourfirstimpulsewhenhandlingnewincominginformationistoorganize
itinsomeway.Youareintheprocessoforganizingthismaterialthatyouarereading.Onceanything,
materialorotherwise,isorganized,ittakesonalifeofitsown.Whenittakesonthislife,itsprimary
purposeandgoalissurvival.Asthischapterisbeingwritten,thereisanationaloutcrytodoawaywith
theIRS.Whatdoyouthinkthechancesare?Beforethathappens,therewillbebloodinthestreet.For
anyorganization,fromthemostcomplextotheverysimplest,thefirstgoalistosurvive.Thefour
largestmoneygatherersanddistributorsintheworldare:
1.War.
2.Medicine.
3.Insurance.
4.Religion.
Thesefourinstitutionscontrolmoremoneythanthemostpowerfulcountryintheworld.Whydothey
enjoythisposition?Becausetheyhavetodowiththesurvivalofourmostpersonalorganization
ourselves.Thepurposeofwaristobreakthingsandkillpeople.Thepurposeofmedicineistorepair
thosewhoaren'tdead,sothattheycanfightagain.Thepurposeofinsuranceistotakecareofthoseleft
bythedead.Thepurposeofreligionistotakecareofthosewhododie.Theseinstitutionshavethemost
moneybecausetheyallhavetodowithourpersonalultimatesurvival.Therealreasonthatmosttraders
loseconsistentlyisthattheyarefittingnewinformationintoold,inappropriatecategories.Ifourusual
wayofhandlingnewinformationistofititintooldcategories,whatisthealternatechoice?Letthenew
informationorganizeitselfWhenthathappens,wehaveatranceendingexperienceofahigherformof
order.Thequestionthenis:Howisthisdoneintradingthemarkets?
ANEWWAYTOHANDLEMARKETINFORMATION

ThesimplestorganizationIcanthinkofisahydrogenatom.Itcontainsoneprotonmadeupof
threequarksandoneelectron.Itjustdoesn'tgetmuchsimplerthanthat.Trillionsofthesegaseousatoms
arefloatingaroundintheairintheroomwhereyouaresitting.Theirfirstinstinct,justlikeyoursand

mine,istokeeptheircurrentlogicorganizationintact.Theyseektoremainhydrogenatoms.Inthis
room,therearealsotrillionsofoxygenatoms.Theyaremuchlargerandmorecomplex,andthey,too,
seektokeeptheircurrentorganizationintact.Asbothofthesegasescirculateandbouncearoundthe
room,theyoccasionallywillcomeintoeachother'sgravitationalfield(Figure21).Thisprovidesnew
information for both of them (the gravitational pull of the other). And even though they are
infinitesimallysmallandareinorganic,theymakewhatcouldonlybecalledanintelligentchoice
whethertokeeptheiroldorganizationasindependentatomsortopermitthenewincominginformation
tochangetheirorganizationalstructure.Theykeeptheircurrentstructure99.99999percentofthetime.
About0.00001percentofthetime,theyletthisnewinformation(thegravitationalpulloftheother
atom)reorganizetheirapproachtotheworld.Whenthathappens,theseatomsTRANCEENDtheirold
limitations and become something entirely new, with all new characteristics and a totally different
organization.TheyhavebecomeH20water.\7Vaterhasvirtuallynocharacteristicsthatareshared
bythetwoformergases.Theywerecompressible,lightasair,invisibletohumansandsoon.Wateris
notcompressible,isheavierthanair,isvisible,andexistsindifferentstates(solid,liquid,gas).The
pointhereisthatthereareonlytwowaysofdealingwithnewinformation:
1.Massage(distort)itsothatitwillfitintoanoldorganization.
2.Permitthenewincominginformationtoorganizeitselfintoanew,different,andunpredictable
organization.
Figure21Howdoyouhandlenewinformation(Chaos)?
Therein lies the difference between a successful approach to trading and the more common losing
approach.Traderswholetthenewincominginformationorganizetheirtradingwillbeinsyncwiththe
market and thereby will be winners. Attempting to fit new incoming information (Chaos) into old
categoriesdistortsboththeinformationandthetrading.ThesurprisethattheScienceofChaosfound
was that there is anunderlying structure towhatseems,onthe surface,to berandom behavioror
information.
MARKETSANDTHESTRUCTUREOFREALITY

Byunderstandingandappreciatingtheunderlyingstructureinthecosmos,wecangaininsightintothe
machinationsofthemarkets.Thefirstoutstandingfeatureisthatthe"laws"ofnatureareflexible,not
rigidasoncethoughtbyclassicalphysics.Thisinsightwillexposethefailureoftraditionalclassical
technicalanalysis,whichfallsintothesametrapsthatclassicalphysicshascreatedoverthecenturies.In
fact,themodern"laws"oftheuniversearemorecloselyalliedwiththeTaoistBuddhistviewthanthat
ofwesterncivilization.Itseemsthatthenatureandstructureoftheuniverseareinaneverendingflux.
Chaostheorysupportsthishypothesis.Chaostheorytendstofocusonprocess;classicalphysicstended
tofocusmoreoncontent.ChaostendstoconfirmtheprocessphilosophyofKant(subjectivism)andthe
modelputforthbyHeraclitus.Chaostheory,then,isarevolutionarytheorywithahistoricalbackdropof
Kantian"possibility"andHeraclitianneverendingflux.Thisviewpointmoreaccuratelyexplainsthe
eventsofastronomy,biology,chemicalandcreativeforces,drippingfaucets,theearth'smagneticfield,
economics,galacticorbits,health,thehumanheart,theflowoftraffic,theuseoflanguage,and,for
traders,thebehaviorofthemarkets.ExamininghowotherresearchershavedescribedChaosmaygive
someadditionalinsightintothisnewgestaltorworldview.JosephForddescribesChaosas"Dynamics

freedatlastfromtheshacklesoforderandpredictability...systemsliberatedtorandomlyexploretheir
everydynamicpossibility....Excitingvariety,richnessofchoice,acornucopiaofopportunity."HaoBai
Lin,aphysicistinChina,describesChaosas"akindoforderwithoutperiodicity...anewlyrecognized
ubiquitous class of natural phenomena." Roderick V. Jensen defines Chaos as "the irregular,
unpredictablebehaviorofdeterministic,nonlinearsystems."2Thisbringsupaninterestingquestion:
How can you have unpredictable behavior in a deterministic system? We are jolted back to the
AristotelianstatementthatsomethingcannotbebothAandnotA.Chaostheory,likequantumscience,
takesissuewithAristotle,andmanyexperimentsshowthatsomethingsbothareandarenotatthesame
time.ItisalmostakindofmysticismifwefollowtheoldAristotelianlogic.DouglasHofstadterwrote:
"Itturnsoutthataneerietypeofchaoscanlurkjustbehindthefacadeoforderandyet,deepinsidethe
chaoslurksaneveneeriertypeoforder."Allrandomnesshasapatterndeeplyimbeddedinit.Thisisthe
underlyingstructureofboththeworldandthemarkets.Mytradingapproachattempts totradethis
underlying order rather than the seemingly random outcroppings we see on the computer screen.
EverydayexamplesofChaos,otherthaninthemarkets,canbeseenallaroundusintheweather,the
flowoftraffic,andthecyclesofliving.Intheweather,forexample,wecanpredictatagenerallevel,
but at another level the weather is random and unpredictable. We know that midsummer days are
generally warmerthanmidwinter days.Therangesoftemperatures forthesummerseasonandthe
winterseasonaresomewhatpredictable. Buttheexacttemperature ismuchlesspredictable.Inthe
market,therearegenerallongtermcyclesthataresomewhatpredictable,butpredictingtheendofa
currentcycleismuchlessprecise.OneofthekeyfindingsofEdwardLorenz,apioneerinChaostheory
atMassachusettsInstituteofTechnology,wasthatthe"noise"thatothermeteorologistshaddiscarded
wasreallyaprimarypartofthemapbeingdrawnbythedata.Mostscientistsandtradersaretrainedin
linear thinking and tend to explain all behavior in Newtonian terms, but Chaos has revealed that
nonlinearthinkingdrawsamoreaccuratemapofpuzzlingsituations.Thesescientistshavefoundthat
"educatedintuition"becomesanimportantfactorinsolvingproblemsandcanbeofgreatbenefitin
extractingprofitsfromthemarkets.Lorenzcoinedtheterm"ButterflyEffect"inexplaininghowsmall
changesininitialconditionschangetheoutcomesoflargerpatterns.Onthedaythatthisisbeingwritten,
thenationalunemploymentwasannouncedatapercentagethatwasslightlybetterthanexpected.This
causedbondstomakeanalmostrecordbreakingdownwardmove,andtheDowdroppedover114
pointstheseventhlargestdropinitsrecordedhistory.ThisnonNewtonianbehaviorcanalsobeseen
intheflowoftraffic.Youusuallycanestimatehowlongitwilltaketogointotownbecausetheflowof
trafficisaboutthesameeveryday.ButweknowalltoowellhowtheButterflyEffecttakesoverwhen
thereisanaccidentduringrushhour.AccordingtoEinstein,theuniverseisoneextremelylargepieceof
matterwiththecharacteristicthatitisunchanginginmaterialmassbutconstantlychanginginshape.
Couldthatalsobeanaccurateassessmentofthemarkets?ThisconclusioncomesfromtakingtheE=
mc2equationseriously.Whenyouthinkaboutmassbeingenergy,theneverythingisreallythesame
thing,assoeloquentlypointedoutbyDavidBohm.

CHAOSVERSUSANALYTICALVIEWSOF
THEWORLDANDTHEMARKETS

Chaostheorystandsinstarkcontrastwithanalyticaltheory.Analyticaltheoryisexacting,butthearea
thatitcanaccuratelydescribeisquitelimited.Itisconfinedtothatsmalldomainofempirical,verifiable
experiencethatcanbebrokendownintosmallerpartsandthenanalyzed.Itseeks"universaltruths"
withinaverylimitedandspecificdomain.Itcanbeusefulinsomecontexts,butdomainssuchasthe

behaviorofthemarketscannotbefullyunderstoodusingthesetools.Chaostheoryalsoanalyzes,butit
demandsfewlimitswithinthedomainofhumanexperienceandbehavior.BothclassicalandChaos
scientistsstudyempiricaldata,butclassicalanalysistendstoignoredatathatChaosacknowledges.In
fact,thevalueofChaosphilosophyisthatitfindsrealmeaninginwhatclassicalanalystsdescribeas
random data. We have a strong tendency to discard data simply because they do not fit into our
preconceived categories whenwedescribebehavior inturbulence andliving systems.Theclassical
approachtobothscienceandtheanalysisofmarketscontainstoomanyfilters,stiffperspectives,and
levelsofintersubjectivitytoteachuswhatisreallygoingon"outthere."Chaospointsinthedirectionof
findingpatternsandstructureswithindifferentlevelsofinquiry.
Forexample,areyoujustacollectionofcellsthatoperateslikeanantcolony?Wheredoyoustartyour
inquirywith the whole or by analyzing each cell (ant)? In medicine, for example, we have foot
specialists,kneespecialists,internalorgansspecialists,andsoon.Ifweputalloftheseobservations
together,dowegetanaccuratepictureofaperson?No.Neithercanwegetapictureofthemarketby
addingupanumberoftechnicalindicators.
Chaostheorygivesusthechallengeofanewmetaphysics.Itfocusesonwhat'shappeningrightnow,
whichdeservesmuchmoreattentioninmarketanalysis.Chaostheorymeetsthechallengeoflookingat
thislargerpicture,capturingthewholeofthemarketriverasitflowseveronward,creatingallsortsof
littlesurprisesalongtheway.Notingtheongoingchangesintheflowisthechallengeofrealmarket
analysis andis the antidote todogmatism, themost fatal diseaseto traders.Chaos is the new and
excitingwaytoviewthechangesinmarketmovement.

CHAOS:THEULTIMATEPARADIGMSHIFT

ThediscoveriesofChaoshaveproventhatalmostallofthepreChaosscientistsweredeadwrongin
theirbasicviewoftheUniverse.Theoldclockworkviewdoesnotaccuratelydescribereality.The
certaintiesthatscientistsformerlytookforgrantedhaveturnedouttobeonlyprobabilities.Lawsthat
weresupposedtoactinverypredictableways,don't.Scientistspreviouslythoughtthatwithknowledge
ofalloftheinitialconditions,accuratepredictionscouldbemade.TheUniversewasthoughttoberuled
byunchanginglaws.Cosmosandcausalityreignedsupreme.Theyalsothoughtthatthismachinelike
Universe would eventually wind down. They called this concept entropy. It basically states that,
eventually,everythinggoesdownthedrain.Chaoshaskilledthisparadigm.Awholenewviewofthe
Universeisemergingaviewthatismorecomplicatedandcarriesmuchmorehopeandspirit.Our
clockworkUniversestartedcrumblingwhenEinsteinandotherphysicistsfoundthatsubatomicparticles'
behaviorcouldnotbepredicted.However,oldideasdiehard.EvenEinsteinclungtotheclockwork
viewandcouldnotbelievethatGodwouldplaydicewiththeUniverse.HissearchforaUnifiedField
Theorywasmotivatedbythisneed,aswashisefforttoexplainawaythechanceandunpredictabilityof
subatomic particles. Much of the physics world to this day wants to follow linear, orderly, and
predictableclocklikeprocesses.Theconflictispassedoffasanexceptionthatprovestherule.Chaos
clearlyshowsthatcausalitydoesnotapplyaspreviouslythought(andstilldesired).JamesGleick,inhis
bookChaos,3pointsouthowsciencehas,forcenturies,fooleditselfbyignoringtinydeviationsinits
dataandexperiments.Thephrase"errorinmeasurement"becamethecatchallfordatathatdidnotfitthe
causalityparadigm.Tokeeptheirintegrity,scientistsbegantolimittheirresearchandinvestigationto
closedsystems,eveniftheyhadtomake themartificial, ratherthantackle theturbulence ofopen
systemssuchasthemarketandnature.Causalitywastheprimeassumptionthattheyneverquestioned.
Their imaginary game of perfect order and fudged experiments could not continue in the face of

overwhelmingevidencetothecontrary.Itbegantocrumblewiththeadventofsuperpowerfulcomputers
that
3Gleick,J.Chaos:TheMakingofaNewScience.NewYork:VikingPress,1987.
werecapableofincludingaberrationsthathadbeenignoredinallpreviousscientificinvestigations.As
thenewinformationbegantoflowin,picturingaverydifferentUniverse,theblindersbegantofallas
moreandmorescientistsinmyriadfieldsfoundthenewparadigmnotjustusefulbutrevolutionary.Our
understanding of our world and our personal lives will never be the same. The evidence is now
overwhelming.Theworldisnotagiganticclock,witheverythinghappeningaspredicted. Chaoshas
won!Simplelinearsystems,causality,andpredictabilityaretheexceptions,nottherule.TheUniverse
worksinjumpsandstarts.FreedomandfreewillStrangeAttractorsmore accurately picturethe
world.Doesthisnewparadigmcauseachasmandwillitdestroythecosmos?No;Chaoshasalways
been here. Chaos brought us here and Chaos will take us further down the road of intelligent
development. Out of Chaos comes a higher form of order, and it comes spontaneously and
unpredictably.Itisselforganized.Creationisanongoingprocess.Theworldisnotaclock,itisagame,
andoneofthebestpersonificationsofthisgameisthemarkets,whichallowchanceandserendipity,
freedomandfreewill,andunpredictablecreativity.Whynotplaythegametowin,tohavefun,andto
gettoknowourselvesbetter?TheUniverseisstillgovernedbylaws,buttheyarenotthelawswe
previouslythoughtwehadidentified.Theyarenotwritteninstone;theyaregeneralandevolving,and
theyaremuchlooserthanwehadpreviouslyassumed.Natureisflexible,andselforganizationisthe
rule,nottheexception.PhysicistPaulDavies,inhisbookTheCosmicBlueprint,says:4
Thereisnodetailedblueprint,onlyasetoflawswithaninbuiltfacilityformakinginteresting
things happen. The universe is free to create itself as it goes along. The general pattern of
developmentis"predestined,"butthedetailsarenot.Thus,theexistenceofintelligentlifeatsome
stageisinevitable;itis,sotospeak,writtenintothelawsofnature.Butmanassuchisfarfrom
preordained.
Apparently,Einsteinneverrealizedtheorganizationthatlurkedjustbelowthesurfaceofwhat
appearedtobenonstructuredrandomness.Heneverreallysawhowentitiescanselforganizetofurther
4Davies,Paul. TheCosmicBlueprint:NewDiscoveriesintheNature'sCreativeAbilitytoOrderthe
Universe.NewYork:CambridgeUniversityPress,1987,p.47.
evolution and to create entirely new symmetries and coherence. He did realize that time is not
mechanical;timedependsonspace.Iftimeisflexible,thenitfollowsthatitisnotpredictablebutitis
stillusefuloverthelongrun.Chaos,whilenottotallypredictableonacasebycasebasis,isstilluseful
andworkableovertimespans.Ourcurrentworldviewisthatwedon'tliveinaclockworkspacetime
continuum.WehaveanintelligentUniversewhereeverythingnotonlythrivesbutevolves,creatinga
higherorderfromolddecayingforms.ItisnowclearthattheUniverseisnotthevictimofentropybut
createsnegentropy;itisnotwindingdownbutbeingcreatedaneweachmoment.Godnowhasthe
appearanceofagiantstrangeAttractor.Thisnewkindoforderisbasedonafewbasicprinciplesfrom
whichmanylawsfollow.Theunderlyingstructureisstablebutdoesnotstandstill.Thephilosophic
implicationsofChaosarepositiveandencouraging.

FROMCHAOSTOCOSMOS

Themarketcanoftenseemaschaoticasourinnerworld,ourstreamofconsciousness.Tomakesenseof
itall,wemustfirstfindthebasicstructuretoreality andthemarketan underlyingstructurethat
revealstheorderunderneaththechaos.The"Chaoticians,"alabelgiventotheminthemovieJurassic
Park, are revolutionizing the world ofscience. Their discoveries are teaching us that Newton, and
indeedalmostallofthepreChaosscientists,weredeadwrongintheirbasicviewoftheUniverse(the
waytheyorganizedincominginformation).Theybelievedthattheworldworkedinfixedways;that
therewasapredictablecauseandeffectforeverything;andthateverythinghappenedaccordingtofixed
physicallaws.Theybelievedincertainties,notprobabilities.TheScienceofChaoshasfoundthatall
outerphenomenaaregovernedbywhatareknownasthefour"attractors"forcesthatbringorderoutof
perceiveddisorder.Theyare:
1.ThePointAttractor.
2.TheCycleAttractor.
3.TheTorusAttractor.
4.TheStrangeAttractor.
TheUniversegoesfromChaostocosmosthroughtheseattractors.Anattractorcanbethoughtof
asasortofamagnetthatpullsenergyinacertaindirection.Itistheforcebehindenergymovementsand
behindchangesinmarketprices.Wewillillustratethefourattractorshereandwillthenapplythemto
tradinginthemarket.Themarketasarepresentativeoftherealworldisfundamentallydisorderedand
free.Chaosreignsoverpredictability.Simplelinearapproachestotradingthemarketdonotwork.The
market is infinitely complex. Freedom and free willStrange Attractorsprevail over rules and
determinacy.Chaosisnottheenemy.FromoutofChaosahigherorderalwaysappears,butthisorder
comesspontaneouslyandunpredictably.Itisselforganizedjustashydrogenandoxygenselforganize
fromgastowater.
THEGEOMETRYOFCHAOS

BenoitMandelbrot(Chaos'smostvisiblepioneer)madeagreatbreakthroughthatcanbesummarizedby
asimplemathematicalformula:
Z>Z2+C
Thearrow(>)meansiterationthefeedbackprocesswheretheendresultofthelastcalculation
becomesthebeginningconstantofthenext:Z2+cbecomeszinthenextrepetition.Likelife,thisisa
dynamic equation, existing in time. It is not a static equation. When iteration becomes a squaring
process, the results are predictable and will reach infinity quickly: 1.1 1.1 = 1.21 1.21 = 1.461
1.461=2.14358,andsoon.Thesameistrueforanynoncomplexnumberthatislessthanone.Itquickly
becomesinfinitelysmall:.9.9=.81.81=.6561.6561=.43046,andsoon.However,byaddinga
constantc(acomplexnumber)tothesquaringprocessandstartingzfromzero,stableiterationsthatgo
toneitherinfinitelylargenorinfinitelysmallbecomepossible.Thesenumbersarecontainedwithinthe
blackareaoftheMandelbrotset(seeFigure22).

THEMANDELBROTSETONACOMPLEXPLANE

Liketheweather,thestockandcommoditymarkets,andotherchaoticsystems,negligiblechangesin
quantities(suchasmayappearinthe
Figure22TheMandelbrotsetonacomplexplane(z>Z2+C).
unemploymentreport),coupledwithfeedback,canproduceunexpectedeffects.Thismirrorsthe
behaviorinthefourthdimension,therealworldwhereChaosisobviousandistheunderlyingstructure
ofthemostorderedsystems.TheMandelbrotset,theformulanamedafteritsinventor,couldnothave
beeninventedwithouttheuseofcomputersandcomputergraphics.Manyscientistsbelievethisformula
isthemostimportantmathematicalbreakthroughduringthetwentiethcentury.Again,itisadynamic
calculationbasedontheiteration(acalculationbasedonconstantfeedback)ofcomplexnumberswith
zeroasthestartingpoint.Theresultofthisformulacanonlybeseenbyacomputercalculationand
graphicportrayalofthesenumbers.TheformulasummarizesmanyoftheinsightsMandelbrotgained
intothefractalgeometryofnaturetheworld,orthefourthdimension.Thisisinabsolutecontrastto
the idealized world of Euclidean forms: the first, second, and third dimensions. The fractal as a
geometricfigurenotonlyhasirregularshapes(asdoesastockorcommoditychart),butlurkinginthe
disorderoftheseirregularshapesisahiddenorder.ThiswasthehiddenorderthatGann,Elliott,and
otherpatternrecognitionpioneerswerelookingforbutdidnothavethecomputerpowertoactuallyfind
ordefine.Anunderstandingofhowthefourthdimensionincludestheinfinityofintervalsbetweenthe
otherdimensionscanbegainedbyvisualizingacoupleofthebetterknownfractaldimensions(called
theHausdorffdimensions bymathematicians).Oneofthemorefamousonesliesbetweenthezero
dimensionandthefirstdimension,thepointandtheline.Itiscreatedbyerasingthemiddlethirdofthe
line.Thisleavestwolines.Wethenerasethemiddlethirdofeachofthoselinesandcontinuethis
processtoinfinity.WhatremainsafterallthemiddlethirdremovalsiscalledbyMandelbrot:"Cantor's
Dust." It consists of an infinite number of points, but no length. Figure 23 is an example of the
beginningofthisprocess.Whatremainsatinfinityisnotquitealinebutismorethanapoint.This
dimensioniscalculatedtohaveanumericalvalueof.63,interestinglyclose(12/lOOOths)tothefamous
Fibonaccinumberof.618.Thiswasconsideredananomalyandwasavoidedbymostmathematiciansin
theearlypartofthetwentiethcenturyasa"uselessmonstrosity."Infact,thisisavitalpartofthereal
world in inorganic matter, plants, animals, and markets. Understanding this phenomenon allowed
MandelbrottosolveaperplexingproblemforIBM:howtoovercomeapparentlyrandomerrorsindata
transmissionbysimpleredundanciesinthetransmission.Withoutthisinsight,theInternetwouldnotbe
workable.Thenextwellknownfractaldimensionliesbetweenalineandaplane,thefirstandsecond
dimensions.NamedtheSierpiniskiGasketafteranothermathematician,WaclawSierpiniski,ithasa
fractaldimensionof1.58(32/lOOOthsawayfromanotherFibonaccinumberof1.618).Youstartwith
anequilateraltriangleandusehalfofthesidelengthstoformthebeginningtriangle.Thearea
Figure23"Cantor'sDust."
thatisleftaccommodatesthreehalfsizetriangles.Repeatthisprocesstoinfinityandyouendup
withaformthathasinfinitelinesbutislessthanaplane.Fractalformsandthesesamerelationshipsare
found in your body. The best known examples are the arteries and veins in mammalian vascular
systems. The bronchi of the human lung are selfsimilar over 15 successive bifurcations. The

Mandelbrotsethasfarreachingimplicationsrangingfromthemarketstothedelicatefunctioningofour
brains.FractaltheoryoffersanewgeometryoftheUniverse,onethatrepresentstherealitiesofthe
marketsandpermitsmoreprofitableoperationsinbothinvestingandtrading.Thisisthesamescience
thatAirForcereconnaissancepilotsusetotellthedifferencebetweentanksandtreeswhentheiraltitude
doesnotallowvisualidentification.Psychiatristsarestudyingtherelationshipbetweenmentalhealth
andfractalpatternsinthebrain.Kinesthesiologistsareusingselfreflectivegeometryofthehumanbody
tohelptheirpatientsheal.Hightechvideoanimationproducersusefractalstocreatespectacular3D
explosions and otherworldly scenes. Textile designers weave fractal symmetry into their products.
Electronicengineersusefractalgraphicstolayoutcomplexcircuitboardrouting.Andnowspeculators
areusingnonlineartechniquesforinvestingandtrading.Fractalsarethemarkets'newtoys.Fractalsare
thewaythemarketsorganizethemselves.Aspecificfractalorganizationisproducedbywhatareknown
in the Science of Chaos as attractors. Think of all preexistence as a universewide quantum soup.
Everythingthatexistsisdrawnoutofthisquantumsoupbyattractors.Theseattractorsactlikemagnets.
TheypullthecosmosoutofChaos.Weusuallyexperienceaconvolutedflowofhappeningsandevents.
Thefragmented,fractalnatureofeverydayrealityisoneofthebasicproblems.Tousethinkingtosort
thingsout,tostartmakingsenseofitall,wemustfirstfindthebasicstructureofreality.Thatstructure
wouldrevealtheorderunderneathChaos.Therearefournonlinearfunctionsthathelpusfindthatorder
inourownconsciousness.Chaosscientistshavefoundthatseeminglychaotic,lawlessactionsinthe
outer world actually follow a hidden order. The order they have discovered is fourfold: all outer
phenomenaaregovernedbywhattheycallthefourattractorsforcesthatbringorderoutofdisorder.
Asnotedearlier,theyarecalledthePointAttractor,theCycleAttractor,theTorusAttractor,andthe
Strange Attractor. These four attractors form the basic structure of the outer world, the nature of
behavior,andthemachinationsofthemarket.Withthisbriefbackground,wecanexaminethesefour
attractorsthatbringorderoutofChaosinthemarkets.Astradersandhumanbeingslivinginthefourth
dimension,weareatourbestwhenwefollowthespontaneityandfreedomoftheStrangeAttractors.
Onlyinthiswaycanweliveandtradeautonomouslyinthemoment,intunewithwhattheChinesecall
theTaotheWay,theflowofforcesinthefourthdimension.
THEPOINTATTRACTOR

ThePointAttractor(Figure24)isthesimplestwaytobringorderoutofChaos.Itlivesinthefirst
dimensionoftheline,whichismadeupofaninfinitenumberofpoints.Wheneverthispointattractoris
controlling,apersonisdrawntooneparticularactivity,orrepelledfromanother.Anewbornbabyis
anillustrationofthePointAttractor.Thebabyisattractedtofoodwhenhungryandrepelledbywetand
dirtydiapers.Itsresponsesaresimilartothepositiveandnegativepolesofelectromagneticenergy.The
middleoftheattraction/repulsioncontinuumisknownasthesaddlepoint.There,alltheenergiesarein
balance,justbeforeoneortheotherforcesbecomesstrongeranddirectstheenergytowardonesideor
theother.Inhumanbehavior,thePointAttractorproducesapsychologicalfixationononedesire(or
revulsion),andallelseisputasideuntilitissatisfied(ordestroyed).Ayoungmaledogaroundabitchis
anothergoodexampleofthetypeofbehaviorthisfractalproduces.ThePointAttractorisablackwhite,
Figure24ThePointAttractor.

goodbad,singlemindedattractor,exceptatthesaddlepoint.Thisisthefirstdimensionattractor,andit
canbeusedtotradethemarkets.Theexacttechniquesfortradingthestockandcommoditymarketsare
examinedandexplainedinlaterchapters.
THECYCLE(CIRCLE)ATTRACTOR

ThecharacteristicoftheCycleAttractor(Figure25)isabackandforthmovement,likeapendulumor
acirclingmagnet.Itattracts,thenrepels,thenattractsagain,andsoon.Itlivesintheseconddimension
ofaplane,whichismadeupofaninfinitenumberoflines.Itischaracteristicofarangeboundor
bracketedmarketwherethepricemovesupanddowninarangeoveraperiodoftime.Thisattractoris
morecomplex thanthePointAttractorandbecomes theunderlying structure formorecomplicated
behavior.Oneactivityautomaticallyleadsintoanotheractivityinarepetitivemanner;itmirrorshowthe
lightofdayisfollowedbythedarkofnight.Innature,itcanbeseeninanumberofwaysforexample,
inpredator/preysystemswheretherespectivepredatororpreypopulations
Figure25TheCycle(Circle)Attractor.
cycleupanddowninrelationtoeachother.Inthegrainsmarket,itcanbeseenonayearlybasis.One
yearofhighpricesproducesmoreplantingsthenextspring,whichproduceslowprices.Thefarmers
thencuttheirplantingacreagetoyieldhigherprices.Incomputers,theelectriccurrentprovidesthese
iterations.TheCycleAttractorproducesastructuraltensionbetweenthetwopolesandopenstheway
forintegrationbetweenthetwoopposites.Synthesiscomesfromcombiningthethesisandantithesis;the
neutronisproducedbytheprotonandelectron.Inthehumanbrainstructure,thetwopartsofthebrain
makepossiblethethirdintegrating,inspirationalpart.
THETORUSATTRACTOR

Thethirdandmorecomplicated attractorisknownastheTorusAttractor(Figure26).Itbegins a
complexcyclingthatrepeatsitselfasitmovesforward.Itlivesinthethirddimension,whichis
Figure26TheseconddimensionalcycleAttractor(Torus).
madeupofaninfinitenumberofplanes.ComparedtotheCycleandPointAttractors,theTorus
Attractorintroducesahigherdegreeofirregularityandthepatternsaremorecomplex.Atthislevel,
predictionsaremorepreciseandthepatternstendtobemorefinite.Graphicallyitlookslikeadonutora
bagel.Itcontainsspiralingcirclesonanumberofdifferentplanesandsometimeswillturnbackonitself
tocompletefullrevolutions.Itsmaincharacteristicistherepeatingfunction.Oneisattractedtocycling
andhikinginthesummerandskiinginthewinter.Ittendstoproduceasortofirregularhomeostasis
forexample,howtheinsectpopulationaffectsthefrogpopulation.Thepresenceofmoreinsectswill
producelargerfrogs,andthelargerfrogswilleatmoreinsects,whichreducestheinsectpopulation.
Havinglessfoodthencreatessmallerfrogs.Itseffectscanalsobeseeninhowtheworld'sassetsseeka
safehaven.Ifthebondinterestgoesup,itattractsmoreinvestors.Bondpricesthengoup,whichlowers

theinterestrateandmakesbondslessattractive,andsoon.Wenowcometotheattractorthatmost
affectshumanbehavior.ItisveryaptlylabeledtheStrangeAttractor.
THESTRANGEATTRACTOR

Figure27showstheMandelbrotsetintwodimensions.Athreedimensionalrepresentationwouldshow
abeautifulworldofspontaneityandfreedomcomingfromtheStrangeAttractor.Itallowsanescape
fromtheconfinesofoldparadigms.TheStrangeAttractorfromthefourthdimensionbecomesself
organizing. Itisthebirthplace offreedomandofunderstanding howthemarket really works.The
surfaceappearstobepureChaos,withnoapparentorderatall.Butthereisadefiniteunderlyingorder
basedontheStrangeAttractorwhentheviewisfromtheperspectiveofthefourthdimension.Another
characteristicoftheStrangeAttractorisitssensitivitytoinitialconditions,sometimesknownasthe
ButterflyEffect.Theslightestvariationinthebeginningcanmakeenormousdifferencesintheend
result.Inourowntrading,wehavefoundthatinstitutingtradesbasedonvaryinginitialconditionscan
raisetheprofitabilityofatradingsystembyafactoroffive.Inotherwords,takingtradesbasedon
sensitive initial conditions can increase profits by 500 percent. Edward Lorenz discovered the
importanceofinitialconditions
Figure27TheStrangeAttractor.
whileresearchingthepredictabilityofweather.HeusedthisnowfamousexampleoftheButterfly
Effect:
ThewingmovementofabutterflyinPerumaylater,
throughanextremelycomplexseriesofunpredictably
linkedevents,magnifyairmovementsandultimately
causeahurricaneinTexas.5

Thissequencehasonlyrecentlybeenscientificallyprovenandverified,butitisreallya
rediscoveryoflongheldfolkwisdom.AsJamesGleickpointsout,sensitivedependenceoninitial
conditionsisanoldideathatcanevenbefoundinnurseryrhymes:
Forwantofanail,theshoewaslost;
Forwantofashoe,thehorsewaslost;
5AsquotedinGleick,J.Chaos:TheMakingofaNewScience.NewYork:VikingPress,1987,p.8.
Forwantofahorse,theriderwaslost;
Forwantofarider,thebattlewaslost;
Forwantofabattle,thekingdomwaslost!
Following the same principle, a trader must be closely attuned to any changes in the initial
conditionsofthemarket.Currenttechnicalanalysispaysvirtuallynoattentiontotheimportanceof
initialconditions.Mytradingapproachinvolvesfivedifferentperspectives:

1.Momentum.
2.Changeinthespeedofcurrentmomentum.
3.Appearanceofaninitiatingfractal.
4.Zonalinfluences.
5.BalanceLinedifferentials.
Bysurveyingallfivedimensionsofthemarket,thetraderbecomesverysensitivetoimportant
initialconditionsbeforethemarketmoves.Whenwearesubjecttothefirstthreeattractors,weare
manipulatedandwebecomepredictable.OnlyintherangeoftheStrangeAttractorcanwereallybe
free.TheStrangeAttractorallowsustoparticipateintheebbandflowofthemarketandoflife.Wecan
addourownbutterflywingtotheweatherofthemarket.Wecanbaseourtrading,aswellasourlife,on
StrangeAttactors.AsDonJuanexplainedtoCastenada,wethenlivein"thecrackbetweentheworlds."
Whenweentertheflow(inathletics,the"zone")weareintunewiththeStrangeAttractor.Wethensee
thehiddenorder.Timestops,andwehaveaflowingpeakexperiencewhereallseemstogorightby
itself.Effortbecomeseffortless,andweknowwithoutknowinghowweknow.WereachLevels4and5
ofexperttrading.Mandelbrotgaveusanaccuratemapfornavigatingthis"crackbetweentheworlds,"
which,inthemarkets,isaspacetimecontinuumofturbulenceandchance.Whenyouhavealossinthe
market,thenstopthatactivity(youareoutoftunewiththecurrentactivity,80cutyourlossesshort)and
choosetoletgoofthinkingofitasafailure.Chooseagaintotakeachance,which,inChaosterms,
meansreturningtozero,wheretheinspirationfornewactioncomesfromthemarketandnotfromyour
desiresoryourformerorganization. Rememberhowthehydrogenatom letgo andbecameamore
complexorganizationknownaswater.Willyouendupawinner?Absolutely.Whatwillwinningmean
toyou?Thatdependsonyourcategoriesandyourbeliefsystems.YougetintouchwiththeStrange
Attractoronlythroughexperiencebackedupbyawareness.Youlearnbytrialanderrorwithfeedback,
by learning from your mistakes, and always by beginning anew from Awareness. Letting Chaos
organizeyourlifeandtradingwillallowyoutoTRANCEENDtothenexthigherlevel.Inthelandof
Chaos,yougetbetterbylettinggo,notbystrenuouslyclimbinghills.Ifthisnewactionisrewardingif
itleadstogreaterorderandcoherence(cosmos)thencontinuetofollowit.Enjoythefractalbeautyof
livingontheedge.Likefailure,anestablishedsuccessshouldleadtofreedom,toanewactivityinan
unknownfuture.Tradingisthemostefficientpsychotherapyandgrowthtechniqueavailable,whendone
withtherightattitudeandtherighttools.Itallowsustopersonallypioneerthefrontiersofcosmosinthe
midstofChaos.Rememberthatthehiddenordermaynotappearimmediately.Itmaybecomeobvious
muchlater,throughaseriesofsynchronousotherevents.Mandelbrot'sownlife,whichhadmanycareer
changes,seemstohavebeennecessarytoleadhimtotheunfoldingofthisneworder.Itisimportant
heretopointoutthedifferencebetweenchanceandchoice,andchanceandchance.Chaos"forthehell
ofit"isadeadend.
THEDIFFERENCEBETWEENAFRACTAL
ANDAHOLOGRAM
Ahologramhasthecharacteristicthateachsmallpartcontainstheentirehologram(withjustabitless
detail). Itisuniform;eachpointcontainsthesamepatternaseveryotherpoint.Inafractal,slight
variationsarefound.Afractalissimilartoaholograminthatthehologramcontainsidenticalrepetitions
oftheexactsamepatternwhileinfractalsthereisonlyselfsimilarity,notidentity.Afractaldoesnot
repeattheexactsamepatternbutitstillcontainsandreflectsthewhole,likeahologram.Becausethe
Universeisafractalratherthanahologram,itpermitscreativityandinvention.Spontaneityandfreedom

aredisplayedeverydayinthemarkets.Whenweviewvariousmarketsandtimeframes,wecansee
similarities,yeteachpart,onfurtherexamination,tendstobeveryindividualisticanddifferentfromany
otherpart.ThatisthegreatjoythefreedomandbeautyinourfractalUniverseaswellasourfractal
markets.Withthemarkets'everchangingpersonality,ourbesthopeistolearnhowtolearn.Onlyafew
basicprinciplesmustbecombined,bent,andmovedtocreatemoreprofitablewaysoffollowingthe
markets'movements.That'swhywewillneverbeboredwiththemarketsandtherewillalwaysbemore
toknow.Withinthebasicparametersandthegivenstructure,thecontentisstillunpredictableinthe
absolutesense.Onlytheoverallpatternandstatisticscanbepredicted.Again,thatisthegreatjoyofthe
markets.Therulesofthegamemaybegivenandlimited,butthetradeswechoosetomakewithinthe
confinesofthoserulesarelimitless,andtheoutcomeofeachindividualtradeisunknown.
SUMMARY

Inthischapter,wehavelookedattheScienceofChaosfromatradingstandpoint.Weeliminated
the nonlinear feedback calculus, which is a rather awesome mathematical exercise, and instead
condensed our 16+ years of intensive study and application of Chaos principles and techniques in
investingandtradinginthemarkets.Inthefollowingchapters,wewillgothrougheachofthefive
dimensionsweusetoanalyzethemarkets,lookingforentryandexitstrategies basedonnonlinear
dynamics and fractal geometry. In the next chapter, we will explore how we use the phase space
betweentheStrangeAttractorstofilteroutthemorepotentiallyprofitabletradesfromthosethathave
notbrokenthestalemateofbeingbalancedbetweentheattractors.
WHATYOUSHOULDUNDERSTANDBEFOREGOINGFURTHER

Atthispointinourjourney,youshouldunderstandthatthisapproachyouarestudyingisnotthe
consensusopinionofthemajorityoftraders.Youshouldunderstandthatnoindividualorcompanyis
largeenough,strongenough,orsmartenoughtocontrolthemarkets.Theyarebeyondeventhemuscle
ofthecentralandinternationalreservebanks.Youshouldalsounderstandthattowinconsistentlyinthe
marketsyoumustgettoknowthemandhowtheyprocessincominginformation.Yourbeststrategyisto
relax youownpersonalgoals andspendthat energyinunderstanding andgettingintunewiththe
markets.Youshouldunderstandthatwealltradeourownpersonalbeliefsystems.Ifyouwanttochange
yourresultsinthemarkets,themostefficientapproachistochangeyourbeliefsaboutthemarketsand
theworld.YoushouldunderstandthatChaosisreallyFREEDOMifyouareinstepwithitratherthan
fighting against it. Finally, you should begin to realize that any sort of organization is itself, by
definition,aresistancetoChaos.Solet'sopenup,relax,andbegintohavefunwiththemarketsandwith
theUniverse.Theyaretwins.