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- The market is stable when it consists of investors covering a large number of investment horizons. This ensures that there is ample liquidity for traders.
- The information set is more related to market sentiment and technical factors in the short term then the longer term. As investment horizons increase, longer-term fundamental information dominates. Thus, price changes may reflect information important only to that investment horizon.
- If an event occurs that makes the validity of the information fundamental information questionable, long-term investors either stop participating in the market or begin trading based on the short-term in formation set. When the overall investment horizon of the market shrinks to a uniform level, the market becomes unstable. There are no long-term investors to stabilize the market by offering liquidity to short-term investors.
- Prices reflect a combination of short-term technical and long-term fundamental valuation. Thus, short-term price changes are likely to be more volatile, or "noisier", than long-term trades. The underlying trend in the market is reflective of changes in expected earning, based on the changing economic environment. Short-term trends are more likely the result of crowd behavior. There is no reason to believe that the length of the short-term trends is related to the long-term economic trend.
- If a security has no tie to the economic cycle, then there will be no long-term trend. Trading, liquidity, and short-term information will dominate.
QuotePreface
In 1991, I finished writing a book entitled, Chaos and Order in the Capital Markets. It was published in the Fall of that year (Peters, q99qa). My goal was to write a conceptual introduction, for the investment community, to chaos theory and fractal statistics. I also wanted to present some preliminary evidence that, contrary to accepted theory, markets are not well-described by the random walk model, and the widely taught Efficient Market Hypothesis (EMH) is not well-supported by empirical evidence.
I have received, in general, a very positive response to that book. Many readers have communicated their approval – and some, their disapproval – and have asked detailed questions. The questions fell into two categories: (1) technical, and (2) conceptual. In the technical category were the requests for more detail about the analysis. My book has not been intended to be a textbook, and I had glossed over many technical details involved in the analysis. This approach improved the readability of the book, but it left many readers wondering how to proceed.
In the second category were questions concerned with conceptual issues. If the EMH is flawed, how can we fix it? Or better still, what is a viable replacement? How do chaos theory and fractals fit with trading strategies and with the dichotomy between technical and fundamental analysis? Can these seemingly disparate theories be united? Can traditional theory become nonlinear?
In this book, Iam addressing both categories of questions. This book is different from the previous one, but it reflects many similar features. Fractal Market Analysis is an attempt to generalize Capital Market Theory (CMT) and to account for the diversity of the investment community. One of the failings of traditional theory is its attempt to simplify "the market" into an average prototypical to the discussion, are interspersed in the text. Each part builds on the previous parts, but the book can be read nonsequentially by those familiar with the concepts of the first book.
QuoteFOREWORD
In 1910 at the request of friends I wrote a small booklet entitled "Speculation a Profitable Profession." In this booklet I gave the rules that helped me to make a success in my personal trading.
January, 1923, I wrote, Truth of the Stock Tape to help those who were trying to help themselves in speculation and investment trading. This book was favorably received by the public and many proclaimed it my Masterpiece. The book fulfilled its mission as evidenced by letters from grateful readers. After predicting the great panic in 1929 there was a call for a new book to bring Truth of the Stock Tape up to date. I answered that call in the early part of 1930 by writing Wall Street Stock Selector giving my readers the benefit of practical experience in which I developed new rules since 1923. In Wall Street Stock Selector I predicted the "Investors Panic," and said that it would be the greatest panic the world had ever known. This prediction was fulfilled by the panic which ended in July, 1932, with some stocks declining to the lowest levels they had reached for the past 40 to 50 years.
A great advance followed the 1932 panic and my rules helped many people to make substantial profits.
In 1935 satisfied readers asked me to write a new book. I responded to that call by writing my third book New Stock Trend Detector in the latter part of 1935, giving the benefit of my experience and new and practical rules which I had discovered.
Since 1935 many changes have taken place; the market passed through the panic of 1937 which was forecast by me. The decline ended in March, 1928, and a minor Bull Market followed to November 10, 1938.
The second World War started September 1, 1939, and the United States entered the war in December, 1941. After we were in the war a further liquidation in stocks occurred and final lows were reached April 28, 1942, when stocks sold below the low level of 1938 at the lowest levels since 1932.
From the lows in 1942 a prolonged advance followed which continued after the end of the Japanese War in August, 1945.
1946, May 29, stocks sold at the highest level they had reached since 1929. My rules and my forecast called the top of this advance and the sharp decline which followed to October 30, 1946, when final low was reached.
Fourteen years have passed since writing my last book and I have gained more knowledge through actual market operations. The world is upset and confused; investors and traders are puzzled over the business depression and the decline in the stock market. Many have written requesting me to write a new book. With the desire to help others I have written "45 Years in Wall Street" giving the benefit of my experience and my new discoveries to aid others in these difficult times. I am now in my 72nd year; fame would do me no good. I have more income than J can spend for my needs, therefore, my only object in writing this new book is to give to others the most valuable gift possible -- KNOWLEDGE! If a few find the way to make safer investments my object will have been accomplished and satisfied readers will be my reward.
W.D. Gann.
July 2, 1949
QuoteAbstract
At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.