Han Xu: What the hell is chaos theory?

Personally, the way to better understand chaos theory lies in its qualitative and application. Qualitative, that is, the process can be deduced and the result is uncertain. When applied to the financial market, the time levels are different and the principle is the same.

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For example, the primary school text tells us that in autumn, geese will fly south, sometimes in herringbone, sometimes in zigzag. I don't know what formation geese will fly south, but it is certain that geese will fly south.

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When fish spawn, they will spawn against the current. I don't know what route he will take, but he will definitely go upstream, that's for sure. I'm not sure how many sunflower seeds will bear on the sunflower plate, but what is certain is that the sunflower is facing the sun. This is a simple explanation of chaotic system.

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Chaotic system is a typical nonlinear system, and its long-term behavior is the direct result of internal nonlinear coupling feedback. A linear system, which is the weighted sum of all parts in the system, is still the solution of the equation. However, all parts of a nonlinear system are interactive, and the result of their superposition is not the most direct sum in a system.

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The market form is also a non-linear system, because if the trading behavior is a linear system, everyone judges that the market direction, opening point, stop loss point, opening point and closing point are the same, and finally the result of everyone's operation is the same, then the financial market will not exist. It is precisely because everyone has a unique view of the market, and there are conflicts in personality and ideas that this market has rivals, matches and transactions, and financial markets can exist.

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Each of us has a different trading system. If we refine it a little bit, we look at the market from different angles, the position of opening positions is different, the range of stop loss is different, the ways of adding positions and reducing positions are different, and the nodes that appear in the end are also different.

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Every link will make your trading result uncertain, which means that our trading system is a nonlinear system and a chaotic system.

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If trading is a nonlinear system and the result is uncertain, is there any way for me to trade?

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Of course there is! Then start with the deducible process. As far as the market is concerned, as long as your conceptual framework and investment model are mature, there will always be opportunities for you to understand. Before the opportunity arises, there are always a few details that you can deduce.

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There is a high probability that there will be opportunities within your framework. If you shoot again at this time, the winning rate will be higher. This is a derivative of the market trend.

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Your own trading system also has room to push down. Chaos is more like an order without periodicity. In an ideal model, there may be infinite internal levels, and there are self-similarity or incomplete similarity between levels. When the resolution of observation means is not high, only a certain level of structure can be seen. When you improve the resolution, a smaller scale structure will appear in the original unrecognizable place.

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For example, at the micro level, because of the uncertainty of the market trend, when we first started to operate, even if we just set a stop loss, there will be several modes, some of which can be based on the point, some can be based on the total amount of funds, and so on. This is the micro-level subdivision model.

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On the macro level, we have established our own trading model, trading concept, trading system and trading system, which are all strategic categories, but on the micro level, we should also make efforts to refine every link in our trading system.

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This can increase the certainty of the superposition of these links, reduce the uncertainty in the trading system, and obtain relatively favorable operating results as much as possible in the unpredictable market operation.