Chaos Theory

Like many theories, the application of chaos theory to the finance world remains extremely controversial. Here’s the theory in a nutshell: Unusual, random, and seemingly irrelevant factors, (such as complex emotions), can be used in mathematical equations to predict their effect on the outcome of certain events, including stock price movement. Yes, some do believe that you can actually predict the movement of financial markets by creating mathematical equations to measure complex, erratic, nonlinear factors.

Let’s just hope those mathematical equations help when your trader is having a bad hair day, which decreases her self-esteem and raises doubts about her future marriage prospects, prompting her to irrationally sell your entire portfolio. Perhaps we’ll stick to fundamental or technical analysis for our investment strategy philosophy.