Fractal Market Analysis - Applying Chaos Theory To Investment And Economics

[Pallas_Boreas]

Preface


In 1991, I finished writing a book entitled, Chaos and Order in the Capital Markets. It was published in the Fall of that year (Peters, q99qa). My goal was to write a conceptual introduction, for the investment community, to chaos theory and fractal statistics. I also wanted to present some preliminary evidence that, contrary to accepted theory, markets are not well-described by the random walk model, and the widely taught Efficient Market Hypothesis (EMH) is not well-supported by empirical evidence.


I have received, in general, a very positive response to that book. Many readers have communicated their approval – and some, their disapproval – and have asked detailed questions. The questions fell into two categories: (1) technical, and (2) conceptual. In the technical category were the requests for more detail about the analysis. My book has not been intended to be a textbook, and I had glossed over many technical details involved in the analysis. This approach improved the readability of the book, but it left many readers wondering how to proceed.


In the second category were questions concerned with conceptual issues. If the EMH is flawed, how can we fix it? Or better still, what is a viable replacement? How do chaos theory and fractals fit with trading strategies and with the dichotomy between technical and fundamental analysis? Can these seemingly disparate theories be united? Can traditional theory become nonlinear?


In this book, Iam addressing both categories of questions. This book is different from the previous one, but it reflects many similar features. Fractal Market Analysis is an attempt to generalize Capital Market Theory (CMT) and to account for the diversity of the investment community. One of the failings of traditional theory is its attempt to simplify "the market" into an average prototypical to the discussion, are interspersed in the text. Each part builds on the previous parts, but the book can be read nonsequentially by those familiar with the concepts of the first book.