Markets And Old-World Mathematics


Many years ago, when I was looking for models to explain how markets behaved, I sought to employ my training as a physicist and translate our understanding of the physical universe into guidelines and principles that could be used to predict markets.

I started with the core principle that mathematics underpins the fundamental laws of the physical world. This means that nature follows the same simple rules, time and time again, i.e. that maths is an essential component of nature that gives structure to the physical world. I always remembered and smiled at the thought that Isaac Newton, who was most famous for his three laws, viewed his study of the world as following God’s work but his study of mathematics as the Devil’s work, and so kept it hidden. Yet his achievements in this field were equally impressive as those in the field of physics, having formulated the same theory as Gottfried Leibnitz 20 years before him. Little did he know that they were the same.

Today, we see the world with fresh eyes, perceiving that nature is a beautiful but unstoppable force that is driven by the laws of our universe, which are defined by mathematics. Contained within it are stunning patterns that can be described with mathematics – galaxies, stars and planets. On Earth, we see bees to blood vessels, ferns to fangs, in which maths can explain how such beauty emerges. However, there are also the unseen manifestations of these core mathematical forces in the form of collective human behaviours that only over the past two centuries have been perceptible through the study of the movement of the prices of currencies, bonds and shares. This has opened up the mathematical study of collective unconscious human behaviour.

The ancient classical world discovered the significance of the golden ratios and geometry and, today, we know them as Fibonacci numbers and Golden Spirals.

Fibonacci numbers were the first and most-obvious starting place. This sequence is at the core of golden ratios that had long-influenced the proportions of classical architecture, linking the human perception of beauty and harmony with a specific mathematical ratio. However, this ratio can also be seen across nature and, very specifically, in sunflower seeds, pine cones and pineapples.

Golden Spirals are a product of Fibonacci numbers and grow in a logarithmic ratio with every quarter turn and are observable in spiral galaxies and nautilus shells.

Both of these mathematical properties are apparent in markets and the retracement harmonics of a market move. However, the key challenge is to work out when a move in market prices is finished and thus is subject to a retracement before the classic Fibonacci numbers, of 38%, 50%, 62% and 76%, can be applied. To solve this problem, over the past four decades modern physics has identified a new mathematical law of nature known as fractals.

Next: Markets And New-World Mathematics



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