Name: Forecasting Financial Markets
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In FORECASTING FINANCIAL MARKETS, Tony Plummer provides a compelling insight into the psychology of trading behavior and shows how the herd instinct in decision-making cab have disastrous results. The ability to make money n markets, he stresses, depends critically on an individuals ability to make decisions independently of the crowd.

Introduction:

We learn from our mistakes, and we interpret the world in the light of our own experiences. Forecasting Financial Markets is a result of both these truths. The argument of Forecasting Financial Markets, then, is that flexibility in the decisionmaking process can be attained by generating three interrelated skills. The first of these is an ability to understand the market in logical terms. That is, an investor or trader should have a philosophical approach to markets that incorporates a genuine understanding of the forces at work.

The point is that markets fluctuate – regularly and, according to traditional theory, unpredictably. If an investor does not clearly recognize this, then they will be unprepared for the reality – the terror – of the situation. The second skill, in a sense, follows from this. An investor needs to be able to understand their own emotional response to market fluctuations. This is a part of what Daniel Goleman calls ‘emotional intelligence’.

If market participants understand their own vulnerability to the influences of financial markets, and if they can recognize those associated behaviours that are potentially self-defeating, then they can do something about it. In particular, they can adopt responses that are appropriate to market trends rather than responses that are hostile to them. The alternative, quite simply, is to become a victim. Finally, of course, an investor needs to be able to design an investment process, or trading system, that generates objective ‘buy’ and ‘sell’ signals. In other words, the signals must be based on predetermined criteria. This approach has two advantages:

– first, it focuses attention on critical factors that tend to recur through time;
– second, it helps to reduce the influence of any emotions that occur at that point in time.

Such a system need not be mechanical: it can have a facility to incorporate signals that cope with unusual circumstances or with investor preferences. The only criterion that ultimately matters is that the investor/trader is sufficiently confident about the signals that they will not continuously be doubted. Market participants should, therefore, be directly involved in the system testing procedures, so that they are aware of both the successes and the limitations. This, of course, also facilitates a creative response to unexpected market developments.

These three skills – the ability to understand market behaviour in logical terms, the ability to know the effects of the market in emotional terms and the ability to decide what to do in objective terms – are the basis of successful wealth creation in financial markets. Further, they enable investors and traders to be detached from the results of each individual investment position in a way that enables them, literally, to enjoy the whole process. In this way, wealth creation and personal fulfilment become a way of life.