Speculative dynamical systems: How technical trading rules determine price dynamics

Abstract

We use fuzzy systems theory to convert the technical trading rules commonly used by stock practitioners into excess demand functions which are then used to drive the price dynamics. First, we define fuzzy sets to represent the fuzzy terms in the technical trading rules; second, we translate each technical trading heuristic into a group of fuzzy IF-THEN rules; third, we combine the fuzzy IF-THEN rules in a group into a fuzzy system; and finally, the linear combination of these fuzzy systems is used as the excess demand function in the price dynamic equation. We transform moving average rules, support and resistance rules, and trend line rules into fuzzy systems. Simulation results show that the price dynamics driven by these technical trading rules are complex and chaotic, and some common phenomena in real stock prices such as jumps, trending and self-fulfilling appear naturally.