Tony Plummer - Forecasting Financial Markets The Psychology of Successful Investing 5th edition ...

434 Pages·2007·11.13 MB·English

PLUMMER
FORECASTING FINANCIAL MARKETS
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Kogan Page Kogan Page US
120 Pentonville Road 525 South 4th Street, #241
London N1 9JN Philadephia PA 19147
United Kingdom USA
www.kogan-page.co.uk Investment and securities TONY PLUMMER
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FORECASTING
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FORECASTING
FINANCIAL MARKETS
The Psychology of Successful Investing
5TH EDITION
TONY PLUMMER
London and Philadelphia
iv
To Glenys
First published in 1989
Revised edition 1990
Second edition 1993
Third edition 1998
Fourth edition 2003
Fifth edition 2006
Apart from any fair dealing for the purposes of research or private study, or criticism or
review, as permitted under the Copyright, Designs and Patents Act 1988, this publication
may only be reproduced, stored or transmitted, in any form or by any means, with the prior
permission in writing of the publishers, or in the case of reprographic reproduction, in
accordance with the terms and licences issued by the CLA. Enquiries concerning repro-
duction outside those terms should be sent to the publishers at the undermentioned
addresses:
120 Pentonville Road 525 South 4th Street, #241
London N1 9JN Philadelphia PA 19147
United Kingdom USA
www.kogan-page.co.uk
© Tony Plummer, 1989, 1993, 1998, 2003, 2006
The right of Tony Plummer to be identified as the author of this work has been asserted by
him in accordance with the Copyright, Designs and Patents Act 1988.
ISBN 0 7494 4749 4
British Library Cataloguing in Publication Data
A CIP record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Plummer, Tony.
Forecasting financial markets : the psychology of successful investing / Tony Plummer. –
5th ed.
p. cm.
Includes index.
ISBN 0-7494-4749-4
1. Stock price forecasting. 2. Investment analysis. 3. Investments. I. Title.
HG4637.P57 2006
332.63’2220112–dc22
2006013221
Typeset by Saxon Graphics Ltd, Derby
Printed and bound in the United States by Thomson-Shore, Inc
v
Contents
Foreword vii
Preface to the fifth edition ix
Acknowledgements xiii
Introduction 1
Part One: The logic of non-rational behaviour in financial
markets
1 Wholly individual or indivisibly whole 9
2 Two’s a crowd 15
3 The individual in the crowd 26
4 The systems approach to crowd behaviour 33
5 Cycles in the crowd 41
6 Approaches to forecasting crowd behaviour 54
Part Two: The dynamics of the bull–bear cycle
7 The stock market crowd 73
8 The shape of the bull–bear cycle 86
9 Energy gaps and pro-trend shocks 107
10 The spiral and the golden ratio 123
11 The mathematical basis of price movements 140
12 The shape of things to come 153
Part Three: Forecasting turning points
13 The phenomenon of cycles 165
14 The threefold nature of cycles 176
15 Economic cycles 201
vi Contents
16 Recurrence in economic and financial activity 217
17 Integrating the cycles 232
18 Forecasting with cycles 245
19 Finding cycles: a case study 256
20 Price patterns in financial markets 270
21 The Elliott wave principle 286
22 Information shocks and corrections 302
23 The confirmation of buy and sell signals 326
Part Four: The trader at work
24 The psychology of fear 351
25 The troubled trader 361
26 The psychology of success 377
27 The mechanics of success 393
28 Summary and conclusions 405
Index 409
vii
Foreword
The last two decades have witnessed dramatic changes in the
behaviour of the free world’s financial markets. The fundamental
causes of these changes must embrace both the end of fixed exchange
rates in the early 1970s and the progressive removal of controls on
international financial flows. However, whatever the precise reasons
may be, the symptoms are evident:
ᔡ a very marked increase in the volatility of prices and volumes in
most markets;
ᔡ sharp and growing clashes between short-term developments and
long-term trends;
ᔡ striking contradictions between market sentiment and economic
fundamentals.
The practical consequences have sometimes daunting and sometimes
humiliating 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 and
applied statistics, conventional forecasting and economic analysis
are 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 strengthen
the techniques we rely on. We need to widen our horizons so as to be
able to heed the methods and results of technical analysis. The
minimum argument for doing so is the cynical or expedient one that
many professionals in the financial markets draw heavily on tech-
nical analysis in one way or another in their dealing as well as their
viii Foreword
writing and advising. A stronger argument is that technical analysis
involves a serious attempt to reflect phenomena such as peer-group
pressure, fashion, crowd psychology and much else, which are
ignored or assumed unreliable by conventional theory. Regrettably,
there has been little common ground sought between conventional
forecasters and technical analysts. Tony Plummer’s book is, in part, a
contribution to that debate. However, it is also a serious attempt to
state systematically the basis of technical analysis in a way that
should interest not only other practitioners and sceptical economists,
but also countless thoughtful managers who are rightly impatient
with expert ‘forecasts’, which are, alas, not always worth the paper
they are printed on.
Sir Adam Ridley
Director General, London Investment Banking Association
Special Adviser to successive Chancellors of the Exchequer 1979–85