It’s been emotional – Applied Forecasting

Emotions, it seems, play just as important a role as fundamentals when it comes to making investment decisions. But objective technical analysis, or a degree in mathematics, also helps.

For treasurers and fund managers everywhere, the fifth edition of Forecasting Financial Markets should be an absolute dream. It bristles with experience and ideas, although you need to be something of a mathematical genius to appreciate the wealth of diagrams, loops, structures and statistics. It also deals with the author's latest research into cycles and the effect of cyclical patterns and rhythms on economic, financial and market behaviour.

There could have been more of the author's recollections and brief accounts of relevant events, though. For example, the Battle of Watling Street over the gilt edge rally of l979 when representatives of City institutions literally fought to get into the Bank of England's issuing office prior to a 10am deadline to cover massive short positions: "For a while the civilised atmosphere of the City of London degenerated into the physical behaviour of a crowd. Many missed the deadline and demand for bonds exceeded the supply and prices soared. The rally extended over eight weeks, day after day, and prices went up almost without pause as if fundamentals didn't matter."

What skills are essential for successful wealth creation in financial markets? The author, Tony Plummer, a director of Helmsman Economics and a former director of Hambros Bank, describes them as the ability to understand market behaviour in logical terms, the ability to know the effects on the markets in emotional terms and the ability to decide what to do in objective terms.

All three skills are explored in detail, but we are warned that truly great traders are very rare. The point is, can they help to make regular and large profits? Can this book really help investors to understand better the dynamics of financial markets? Could there be an emotional gateway to penetrate between the generation of a buy or sell signal? And how important is technical analysis?

The case in its favour is the claim that it is possible to forecast the future performance of a particular market by reference to the actual and historical performance of that market. With technical analysis, it should be apparent, the author argues, that the obvious role for successful investment is to keep a close watch on what other investors are saying and doing and then, when the vast majority are saying and doing the same thing, do the reverse.