Trading Book Reviews

Book Review: Making Sense of the Dollar

[easyazon-link asin=”1576603210″][/easyazon-link]I’ve just finished reading [easyazon-link asin=”1576603210″]Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange[/easyazon-link] by Marc Chandler. You may be familiar with Chandler from appearances on CNBC. He is currently the Chief Foreign Exchange Strategist at Brown Brothers Harriman, having prior held a similar post with HSBC. He’s written a number of magazine and online articles, and teaches at NYU as well.

What Chandler looks to do with Making Sense of the Dollar is to dispute many of the commonly held views about the US currency, international trade, and related economic and political considerations. He does this by presenting ten myths and criticisms of them. Those myths are:

  1. The Trade Deficit Reflects US Competitiveness
  2. The Current Account Deficit Drives the Dollar
  3. You Can’t Have too Much Money
  4. Labor Market Flexibility is the Key to US Economic Prowess
  5. There is One Type of Capitalism
  6. The Dollar’s Privileged Place in the World is Lost
  7. Globalization Destroyed American Industry
  8. US Capitalist Development Prevents Socialism
  9. The Weak US Dollar Boost Exports and Drives Stock Markets
  10. The Foreign Exchange Market is Strange and Speculative

I went into the book looking to view it from the perspective of a forex trader (and in my own case, analyst as well). With that in mind, while the amount of repetition was at times annoying, and in some places the author could have presented more evidence to support his assertions, the book certainly contains a lot of thought-provoking material.

The myth sections I found most interesting in regards to gaining insight into the workings of the dollar are 1, 2, 6, and 9. Not that the others aren’t interesting. It’s just that these four really, for me, get to the major critical issues which a lot of market watchers point at in terms of why the dollar has lost or can be expected to lose its position as the premier world currency.

I can tell you that the trade and current account deficits are things my professional colleagues often point to as unsustainable issues which eventually will have to correct – to the detriment of the dollar. Chandler says both are flawed measures based on outdated methodologies which do not properly account for modern trade and capital flow.

In terms of Myth 6 about the dollar losing its place, the author brings up a number of defenses for the greenback. One of them is the view that I myself have expressed on several occasions that one of the reasons that the dollar is the top reserve currency is the breadth and depth of the US financial markets. No other country or region can come close to matching them, making the US the place where excess savings looking for a safe place to sit comes, as witnessed by the dollar’s gains during risk aversion.

As to the idea that the lowering dollar’s exchange rate will boost exports and reduce imports, Chandler indicates that there’s no real evidence to support that notion. For example, he notes that in the early 90s a pair of Congressmen suggested that the dollar was 20% overvalued and that it needed to come down to close the trade gap. The dollar trended down for most of the decade, losing about 20% of its value in that span, but the trade deficit actually expanded. The author also points out that much of the cost of import goods to US citizens is actually added on to them once they reach our shores, so that the value of the dollar isn’t really a major influence on the prices we see. And of course he also points out that the largest portion of our imports comes in the form of oil and related products, the demand for which is relatively inelastic over the short- to intermediate-term.

New forex traders can often be heard to ask questions about what fundamental factors drive exchange rates, and with good reason. It can be a very confusing market in that regard as things which are clear drivers in one direction one week can be drivers in the other direction later. Chandler does a really good job in the space of a couple of pages in the 10th myth chapter of addressing the primary factors impacting the forex market and the concept of currency valuation. That’s really the only place “trading” of currencies is discussed. The rest of the book is more focused on looking at the big macro dollar picture.

As much as Chandler makes some interesting points about Capitalism vs. Socialism, in my view he spends too much time on the subject. One could even ask whether he needed to address it at all, but I was fine with it overall. He just got a bit repetitive on the subject.

The bottom line as far as Chandler is concerned is that the dollar is just fine the way it is and that attempts to focus on imports and exports and weaken the dollar to influence them could produce serious negative consequences. I definitely recommend [easyazon-link asin=”1576603210″]Making Sense of the Dollar[/easyazon-link] to anyone interested in the macro view of the dollar and global currency markets.

Make sure to check out my other trading book reviews.

The Basics

Some Not-So-Great Tips for Using Stop Orders

Stock Trading to Go posted 10 Great Tips For Using Stop Loss Orders Successfully the other day. I’ll give the listing a middle grade. There are some good suggestions, but there’s also some stuff which range from perhaps too narrowly focused for general use all the way to just completely wrong.

First of all, I don’t agree with the idea put forth before the list of tips that stops are like insurance. Insurance makes you whole on losses suffered. Stops only provide a measure of assurance that they don’t get too large.

Here are the tips I’m good with:

2. Watch for hidden fees.
3. Never assume a stop loss order has been filled successfully.
6. New investors should use only stop market orders.
7. Use stop loss orders to setup a profit vs loss ratio.

In the case of #2, it’s a case where some brokers charge extra for non-market orders. And of course traders should always confirm all order entries and executions, which is #3.

In terms of #6, the comparison is against stop limit orders, which is where when a stop price is reached a limit order is activated rather than a regular market order. The difference is that a limit order will only be executed at the specified price or better. That means your order may not get filled, which you absolutely don’t want happening.

As for #7, I’ll go along with stops enforcing discipline and can help to better trade selection.

Now here are the ones I take issue with.

1. Never use stop loss orders for active trading.
4. For the original placement always give the stock at least 5% of space to avoid market maker abuse.
5. Don’t use stop loss orders for large positions.
8. Keep an eye out for after hours trading gaps.
9. Set the trigger price at common price increments.
10. Use with stocks that have high average daily volume.

Long-time readers of this blog know that I am not a fan of anyone using always or never in terms of trading rules, so you can guess my reaction to #1. That aside, the author is suggesting that because you’re in front of the screen watching the market you don’t need the stop. My contention is that stops help enforce discipline, and what happens if you are distracted by something while you’re trade is on?

Tip #4 is one that doesn’t fit many people’s trading. Short term traders, for example, may never expose themselves to a contrary move that large. I do, however, agree that stops should account for normal volatility.

Now for the really big problem for which I’m going to lump tips #5, #8, #9, and #10 together because they are all based on the same error in understanding. It’s one that appeared in the prior post that’s referenced at the outset of this one. The blogger is under the mistaken belief that a stop order will not get activated unless the market specifically trades at the order price. That is just flat out wrong, as this Investopedia definition indicates (italics mine):

What Does Stop Order Mean?
An order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor’s loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order.

I tried to correct the blog author via comment when I saw the initial error, but it never went through (apparently). That site is one with a pretty large amount of traffic, suggesting the perception of authority, so I’m really surprised to see that kind of error being made.