Tony Plummer - Forecasting Financial Markets The... (PDF) (2024)

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PLUMMERFORECASTING FINANCIAL MARKETS11/06 2:56 pm Page 1“This book will entertain and intrigue keen investors.”Financial TimesFORECASTING 5TH EDITIONof In Forecasis a FINANCIAL MARKETS Plummer pBank Ltd into the psment PLC. behaviourrket assets instinct can1999, “This book will entertain and intrigue keen investors.” 5TH EDITION FORECASTING individual icurrencies, money in mFinancial Timesdent an individud rhythms independe“Tony Plummer… has written a book that is almost breathlesssuch indepin its enthusiasm for his chosen craft.”acquire thewd The Independent FINANCIAL MARKETSalysis in • understand the Far “A brilliant, original, insightful work… deserves to be read logical tegree from by all serious technical analysts.” • recognizThe Psychology of Successful Investingterbury The Independent emotionathe fluctuatios. He is a “Should interest not only practitioners and skeptical economists, but also • design aechnical countless thoughtful managers who are rightly impatient with trading sactitioner expert ‘forecasts’, which are, alas, not always worth objectiveing. the paper they are printed on.”The book eSir Adam Ridley (writing in the Foreword)dimensionsThis fifth eFinancial Mupdated toauthor’s latthe implicaand rhythmfinancial mdeal with:• the phen• the three• economi• recurrenactivity;• forecasti£45.00 • finding cUS $79.95Kogan Page Kogan Page US120 Pentonville Road 525 South 4th Street, #241London N1 9JN Philadephia PA 19147United Kingdom USAwww.kogan-page.co.uk Investment and securities TONY PLUMMER

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iFORECASTINGFINANCIAL MARKETS

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iiiFORECASTINGFINANCIAL MARKETSThe Psychology of Successful Investing5TH EDITIONTONY PLUMMERLondon and Philadelphia

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ivTo GlenysFirst published in 1989Revised edition 1990Second edition 1993Third edition 1998Fourth edition 2003Fifth edition 2006Apart from any fair dealing for the purposes of research or private study, or criticism orreview, as permitted under the Copyright, Designs and Patents Act 1988, this publicationmay only be reproduced, stored or transmitted, in any form or by any means, with the priorpermission in writing of the publishers, or in the case of reprographic reproduction, inaccordance with the terms and licences issued by the CLA. Enquiries concerning repro-duction outside those terms should be sent to the publishers at the undermentionedaddresses:120 Pentonville Road 525 South 4th Street, #241London N1 9JN Philadelphia PA 19147United Kingdom USAwww.kogan-page.co.uk© Tony Plummer, 1989, 1993, 1998, 2003, 2006The right of Tony Plummer to be identified as the author of this work has been asserted byhim in accordance with the Copyright, Designs and Patents Act 1988.ISBN 0 7494 4749 4British Library Cataloguing in Publication DataA CIP record for this book is available from the British LibraryLibrary of Congress Cataloging-in-Publication DataPlummer, Tony.Forecasting financial markets : the psychology of successful investing / Tony Plummer. –5th ed.p. cm.Includes index.ISBN 0-7494-4749-41. Stock price forecasting. 2. Investment analysis. 3. Investments. I. Title.HG4637.P57 2006332.63’2220112–dc222006013221Typeset by Saxon Graphics Ltd, DerbyPrinted and bound in the United States by Thomson-Shore, Inc

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vContentsForeword viiPreface to the fifth edition ixAcknowledgements xiiiIntroduction 1Part One: The logic of non-rational behaviour in financialmarkets1 Wholly individual or indivisibly whole 92 Two’s a crowd 153 The individual in the crowd 264 The systems approach to crowd behaviour 335 Cycles in the crowd 416 Approaches to forecasting crowd behaviour 54Part Two: The dynamics of the bull–bear cycle7 The stock market crowd 738 The shape of the bull–bear cycle 869 Energy gaps and pro-trend shocks 10710 The spiral and the golden ratio 12311 The mathematical basis of price movements 14012 The shape of things to come 153Part Three: Forecasting turning points13 The phenomenon of cycles 16514 The threefold nature of cycles 17615 Economic cycles 201

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vi Contents16 Recurrence in economic and financial activity 21717 Integrating the cycles 23218 Forecasting with cycles 24519 Finding cycles: a case study 25620 Price patterns in financial markets 27021 The Elliott wave principle 28622 Information shocks and corrections 30223 The confirmation of buy and sell signals 326Part Four: The trader at work24 The psychology of fear 35125 The troubled trader 36126 The psychology of success 37727 The mechanics of success 39328 Summary and conclusions 405Index 409

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viiForewordThe last two decades have witnessed dramatic changes in thebehaviour of the free world’s financial markets. The fundamentalcauses of these changes must embrace both the end of fixed exchangerates in the early 1970s and the progressive removal of controls oninternational financial flows. However, whatever the precise reasonsmay be, the symptoms are evident:ᔡ a very marked increase in the volatility of prices and volumes inmost markets;ᔡ sharp and growing clashes between short-term developments andlong-term trends;ᔡ striking contradictions between market sentiment and economicfundamentals.The practical consequences have sometimes daunting and sometimeshumiliating challenges for forecasters but, far more importantly,much greater risk and uncertainty for businesspeople and traders.Despite the vast flow of data and major advances in computing andapplied statistics, conventional forecasting and economic analysisare all too often not providing the guidance market operators need.So, it is clear that we should now ponder on why this is and consider,in an open-minded way, what can be done to broaden and strengthenthe techniques we rely on. We need to widen our horizons so as to beable to heed the methods and results of technical analysis. Theminimum argument for doing so is the cynical or expedient one thatmany professionals in the financial markets draw heavily on tech-nical analysis in one way or another in their dealing as well as their

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viii Forewordwriting and advising. A stronger argument is that technical analysisinvolves a serious attempt to reflect phenomena such as peer-grouppressure, fashion, crowd psychology and much else, which areignored or assumed unreliable by conventional theory. Regrettably,there has been little common ground sought between conventionalforecasters and technical analysts. Tony Plummer’s book is, in part, acontribution to that debate. However, it is also a serious attempt tostate systematically the basis of technical analysis in a way thatshould interest not only other practitioners and sceptical economists,but also countless thoughtful managers who are rightly impatientwith expert ‘forecasts’, which are, alas, not always worth the paperthey are printed on.Sir Adam RidleyDirector General, London Investment Banking AssociationSpecial Adviser to successive Chancellors of the Exchequer 1979–85