Examining the intricate landscapes of complex adaptive systems (CAS), one quickly discovers that their evolution is far from a neatly organized, linear progression over time. Rather, it manifests as dramatic leaps, akin to abrupt scene changes in a theatrical performance. These jumps or transitions are the defining moments in the lifespan of a CAS, woven together by intervals of relative tranquillity.

When one scrutinizes these seemingly serene periods of stability, they’ll uncover subtle changes. These shifts could be likened to gentle ripples on a calm lake, dancing around the equilibrium state of a specific regime. Imagine for a moment the price trends connected with these predictable regimes; they are directionally trending series which are part of a larger, mean-reverting cycle. These tranquil, stable regimes act as the fertile ground where statistics bear fruit. Here, we can extract statistical properties that enable us to forecast future price trends, capitalizing on the predictability inherent within these zones.

These stable regimes can be envisaged as a gently swaying pendulum, with each swing predictable due to the statistical properties of the distributions identified within these steady states. This predictability within the tranquil regimes gives rise to what we’ve termed ‘convergent strategies’. These are founded on the principle of convergence, the belief that price will inevitably gravitate towards its equilibrium state, much like a pendulum oscillating back and forth, gradually settling itself around the mean of its distribution.

However, when we turn our gaze to the tumultuous transition events, separating the periods of a stable regime, a different narrative unravels. Trends emerge here too, yet they are capricious, untamed, and cannot be constrained by the statistical frameworks used to understand the convergent regimes. This is the realm of the Outliers: unpredictable trends, whose timing and qualities remain elusive until they unfold, defying statistical definition. One might say, this is the territory where the proverbial ‘dragons’ dwell.

Transition events embody the divergent phase transitions happening between two more placid states: the pre-transition state and the post-transition state. The transition itself is akin to an earthquake, with the shake-up being a chaotic disruption of the former steady state that eventually subsides, giving birth to a new, distinctively different stable state.

Predicting the magnitude of a transition event is as complex as forecasting the scale of an earthquake. It demands an understanding of the nature of the stable regimes flanking this seismic shift. Sadly, we don’t have a crystal ball to anticipate the properties of the future stable state that materializes after the transition event.

Transition events are often synonymous with system ‘phase changes’. Consider the transition of H2O molecules from solid to liquid, and then to a gaseous state. We understand the distinct statistical properties of these separate phases, yet the detailed unfolding of events as H2O transitions between these ‘stable states’ remains an enigma. This transition is inherently chaotic, and necessitates a comprehensive disruption and dismantling of the dependencies and interrelationships from the prior state, to make way for a new state with fresh dynamics.

The key characteristic of a transition event is its disruptive, chaotic nature. It symbolizes a system offloading its order over time, within a regime teetering on the edge of chaos. As the system gradually morphs from low to high entropy, it adopts a series of seemingly stable states. For a while, they endure, until the next transition event disrupts their stability, paving the way for a comprehensive reconfiguration into a higher entropy formation. The change isn’t gradual, rather it is a haphazard process of punctuated equilibrium, where the system evolves in abrupt, intermittent surges.

The quintessential trend follower is on a quest for a unique kind of trend, one associated with transition events. The allure lies in their potential to significantly exceed the predictions of statistical analysis. Here, we see the manifestation of the 80/20 rule: this zone is the breeding ground of fortunes or the genesis of disasters. In this chaotic realm, we abandon our predictive tools that fall short, resorting to timeless wisdom: we cut our losses short and let our profits run.

Trade well and Prosper

The ATS mob