Embracing Chaos When Trading And Investing

The "Butterfly Effect" refers to the idea that a butterfly's wings might create tiny changes in the atmosphere that ultimately cause a tornado to appear (or prevent a tornado from appearing). The flapping wing represents a seemingly irrelevant action that can cause tremendous long-term effects. In other words, had the butterfly not flapped its wings, the outcome might have been vastly different.

"Chaos Theory" is a financially related term for the Butterfly Effect. Proponents of Chaos Theory believe that price is the very last thing to change for a stock, bond, or some other security, and that price changes are created through a trader's own personal motives, needs, desires, hopes, fears and beliefs. In addition, those who believe in Chaos Theory believe that it is about explaining apparent disorder in a very ordered way, and that things are not random, just complex.

Financial markets, from the outside, appear to be random and unpredictable, but "as all traders know" every single financial decision is made consciously and is, in fact, the opposite of random. Yet, with the complexity of the trillions of financial decisions made every day, the results can appear to be far from rational.

So, the markets can create an atmosphere of "regulated chaos." Is that something traders should consider as they make their trades? Absolutely. Should they worry about the Chaos Theory and the Butterfly Effect? Probably not. Through risk management, knowing your tolerance, and following your plan, you can thwart the potential effect that these situations might have on your financial picture. Take precautions and accept that chaos and uncertainty is just the inherent nature of the market.

Trading is filled with stress and even a certain amount of woe. There is money at stake. Money is one of those things that you can't live without. Losing too much of it can seriously impact your life, your livelihood, and even in some cases, your entire financial future. Money is a necessity in this life that absolutely can't be ignored. So there are times when things really can get a little sticky when the stress hits a level of intolerance. However, worry on your own time.

Don't bring it to the next trade or enter it into your withdrawal. Take it somewhere else (preferable not home to the family) where you can blow off some steam and recollect your ability to think clearly. For as much information as there is out there on being objective, there is something to be said for taking your stress to the racquetball court or out on your daily jog or make it part of your daily laps in the ocean.

Whatever it is that you do to blow off your stress, that is where your worry belongs. Blow it out there, change your perspective, and your home and trading life will maintain a strong level of balance and ease.