My good friend JP has started a new blog called Fractals, Technical Analysis and other things.. JP trades the forex market when he’s not busy being a philosopher, mathematician and super book devouring machine :-)

Here’s an interesting thought from a post explaining his interest in fractals:

Something I completely agree with, but then, if a technical analyst is to reject this Random Walk view of price movement, shouldn’t he reject as well the mathematical ramifications of this assumption rather than to use them as tools. In a Gaussian model, the average (the mean) clearly is a good information to consider, it is the quantity that has the highest probability to be realised, and the closest to the average, the higher the probability is.

The large pool of experimental data we have from financial markets, however, tells us that they don’t follow a Gaussian distribution, they diverge from it in various ways but a remarkable one is that they are fat-tailed , which means that the probability for the variable to be far away from the average is actually higher than in the Gaussian model (i.e. extreme variations are more frequent than what is predicted by the model). And that is important, because it tends to make our beloved Average less useful, in terms of prediction, while the differences are not such that Averages don’t retain any usefulness. But more precise tools may likely be derived from a more fitting model of the real price movement.