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A Butterfly Flaps Its Wings... Chaos Theory And The Financial Markets

A butterfly flaps its wings... a hurricane strikes miles away.

According to Chaos Theory, a seemingly irrelevant action can precipitate, and contribute to, a major event. The right set of factors comes together and a major event takes place.

It's easy to imagine a fanciful chain of events that would initiate a market move.

A housewife attends to her crying child who has tripped over the newspaper, and in doing so, leaves the refrigerator open during an unseasonably warm day. It breaks down, and the family needs a new one.

To get funds for a new refrigerator and some added home repairs, she sells off a large chunk of IBM stock that her parents gave her as a wedding present.

By pure chance, at the moment that she sells the stock, a specialist monitoring the action gets it in his head that the sale of a large chunk of stock means something, so he sells off his positions in the tech sector.

Next, a financial reporter sees the sale and tries to interpret it. He reports that it reflects a shortage of silicon and suggests investors unload their tech stocks immediately.

Many people follow his advice and a massive sell off takes place.

Perhaps it seems a little unlikely that all of this can happen, but you get the idea.

Just like how scientists claim, according to Chaos Theory, that a butterfly can start a hurricane, you can imagine that a few key seemingly minor events can start a major market move

Is It Economic Factors? Or Fear And Greed?

Many investors view the markets from a traditional long-term buy-and-hold strategy. They look at the markets in terms of fundamental variables, such as consumer confidence, demand, and general economic factors that impact a stock price.

If a company makes profits that are in high demand, the price goes up.

Market timers though, realize that many market moves are the result of psychological factors, such as opinions or emotions of fear and greed. In the short-term, anything can happen, and it is vital to keep this in mind.

Nothing is certain in the markets, but is this something to worry about?

Not if you take precautions. By precautions, we mean "following a strategy that uses the ups and downs (trends) of the market itself to generate buy and sell signals."

This way you are always in the current trend, never miss a trend, and are never trading against the market's trend.

Worry Can Be The Doom Of Market Timers

Indeed, a potential chaotic event can be a good thing.

The initial event that set off a market move isn't important. Who cares why the masses buy or sell, for example, as long as you take advantage of the move?

Market timers must learn to view such moves as opportunities to profit.

If you have a timing signal that is ruined by an unexpected adverse event...the chaotic nature of the markets coming to the forefront... there is no reason to worry.

In fact, it is absolutely "going to happen." Signals will go against you. Accept this and you will profit. Worry so much that you jump out of a tried and true strategy because of a losing trade or two, and you will eventually fail at timing the markets.

If you are following a trend, and it unexpectantly reverses, the (trend following) strategy will quickly reverse and place you right back on the right path.

It is necessary to accept that trading can be chaotic. Anything can happen, but it doesn't need to be a source of worry. As long as losses are kept small, and profits are allowed to run, you will beat the markets.

Worry can be the doom of market timers and traders, but if you accept the fact that uncertainty and chaos are part of the inherent nature of the markets, you will accept it when it occurs and recognize that this same chaos is what will make you profitable in the end.

A losing trade here. A losing trade there. All meaningless in the big picture. By following trends, which is FibTimer's market timing specialty, you are always profitable over time.

You profit in "all" of the big trends. By following trends with FibTimer's timing strategies, you are always with the big market moves when they occur...and there is always a big move (trend) just around the corner.