Financial markets can be viewed from two perspectives:
As a predictable process. This approach suggests that the market can be “calculated” and patterns can be identified.
As a dynamic chaotic system. Here, markets are seen as constantly evolving, and understanding their behavior requires accepting their complexity. Chaos does not mean disorder; rather, it refers to a system with a base order that can be interpreted using specific standards and possibly indicators.
Which approach to choose?
This is largely a matter of belief. It’s worth trying both to make an informed decision.
If you opt for the first approach, you have access to:
Elliott Wave Theory, its continuation (Neo-waves), Gann’s waves, and Wolfe’s waves.
Harmonic wave patterns: Gartley, Bat, Crab, Butterfly.
Hurst Cycles and Robert Lee’s Market Rhythm Theory.
These theories use volatility, measured with indicators like ATR and Bollinger Bands.
The second approach (Chaos Theory):
In this case, you’re likely to encounter Bill Williams’ Chaos Theory, which builds on the Efficient Market Hypothesis.
I developed my approach called the Borbot Cycle.
Why this approach was developed
After becoming disillusioned with the idea that markets are predictable, I embraced chaos. Most theories are too complicated. For example:
Elliott requires counting up to five.
Wolfe—up to six.
Williams uses at least three indicators (Alligator, Awesome Oscillator, Accelerator Oscillator) and five phases of the market.
Complexity leads to more opportunities for error. The more structures you consider, the greater the chances that things will go wrong.
The Simplicity of the Borbot Cycle:
The cycle consists of two phases, where each phase is a movement up + down or down + up (classical wave). The second phase must exceed the extremes of the first:
When rising, the second phase’s maximum exceeds the first phase’s maximum.
When falling, the second phase’s minimum exceeds the first.
There are only two anomalies:
The second phase is at most the extremes of the first.
The first phase of a new cycle switches direction.
To construct such a cycle, you need:
A signal to mark the beginning/ending of each price movement. For example, touching the upper Bollinger Band.
A minimum volatility level. The price must travel several points before the signal confirms the move.
How it works
The first phase ends when the signal is confirmed (for instance, when the price touches the opposite Bollinger Band).
The second phase should surpass the first phase’s extreme. If it doesn’t, you enter a new cycle.
If the extreme is surpassed, the cycle is complete, and you start the next cycle in the opposite direction.
