Chaos in the Market and How You Can Get around It
Whether you’re a full time investment banker or a novice to the world of investment, one of the concepts that people find challenging is chaos. Chaos is a phenomena that can be found inherently in any system that has moving parts, and the financial markets are one such system – albeit a complex one (thus, the market is a complex system).
So why do you need to know about chaos? Well, chaos is a factor that can make the buying or selling of a particular financial asset extremely difficult, and so understanding chaos can allow you to make better judged, better informed decisions on your investment. In this article, we’ll explore the topic of chaos in a general sense, how it applies to investing and trading and then see how you can combat it.
The Nature of Chaos
Chaos is a naturally occurring phenomenon that can be found in any complex system. A complex system is a system where there are multiple parts that interact in ways that produce unpredictable behavior, and this behavior is said to be chaotic.
A good example of a complex system that exhibits chaos is the weather. Various factors like temperature, air density, and toxicity combine to define how the weather emerges and behaves. As a result of the fact that there are so many variable factors, the weather is notoriously difficult to predict.
The Economy as a Chaotic System
Now that we know what chaos is and we understand how it emerges – given the example of the weather – we can start to look at how chaotic behavior is exhibited in the economy. It’s obviously a truism that the economy is a complex system. With millions of people inputting and withdrawing from it, with its numerous regulatory institutions such as the Bank of England, and with its ability to be manipulated for personal gain, the economy is almost a living, breathing thing.
Resultantly, the economy exhibits chaos almost all of the time. This is why the markets are so hard to predict, and it’s how investors make and lose money. After all, no form of investment is without risk.
Dealing with the Chaos
Chaos in the market is inherently unpredictable, meaning that it will always be a challenge to make sense of chaotic data. However, tools like standard deviation can help to tell you how the particular financial asset you’re examining has behaved in the past in similar circumstances. Standard deviation is a simple statistical tool that allows you to calculate the mean amount of chaos (both positive and negative) in your market. If you want to know more, experts like the ones at Killik & Co. can help you to understand the math in more depth.
Ultimately, chaotic behaviors is a fundamental fact of nature, and it is found in all complex systems – one of which is the economy and the financial markets. Therefore, even knowing that chaos exists puts you one step ahead of your investing competition. So learn about chaos, and you’ll be a safer investor.