The Way of the Dollar: Trading currencies for profit

By John Percival

THE WAY OF THE DOLLAR

 

TRADING CURRENCIES FOR PROFIT

 

As readers know, my approach to analysing the currencies – its method – is essentially anti-crowd. We look where the crowd is not looking for an underlying rationale for the direction of the main trend. And we use a series of contrarian* sentiment indicators designed to orient us in the opposite direction to the crowd. This method has worked well, and it is timeless so it should always work. The method is OK. If we can have confidence in it and can apply it, we shall win.

 

"My all-time favourite currency guy is John Percival (now retired and living comfortably in the French countryside I understand). My respect for his insights over the years is immense."

 

"I have been a reader of John’s newsletter for over 20-years. I have learned a great deal from him, through his writings. There is a wealth of insights which I took from a very beaten up copy of his book, The Way of the Dollar, published back in 1991."

 

"Mr. Percival doesn’t know this, but he was the only mentor I had in this market. I read his book from cover to cover to cover … pages are falling out … highlighted and notes everywhere. His book provides more insight every time you go back to it. And I go back to it often."

 

"John Percival made a key point in the book that struck me – my belief in what matters when it comes to markets has little to do with trading success.  I believed I was well armed given my freshly-minted MBA in finance and economics.  I had already worked as a financial analyst and even did a stint in the never-never land of corporate strategic planning (talk about being paid to do absolutely nothing of value). Anyway, Mr. Percival’s book opened my eyes, but at the time I still didn’t understand just how valuable his advice was."

 

"After years of trading and barking up all kinds of analytical trees, with major failure and moderate success in currencies, I went back to Mr. Percival’s book.  This time I appreciated what was right there in the introduction:"

 

Finally one had to see if there were other relationships which had any predictive value for currencies like inflation, trade, money supply, oil prices, economic growth, et al. So far, the conclusion is that few such relationships and none of the relationships that most observers seem to rely on are useful for predicting the dollar.

 

"Say what? I thought to myself. Heck, I have all these so-called analytical skills and education and now I’m effectively being told by John Percival if you want to trade currencies and make money, you better pack up that degree and see the market for what it is, not what you think it is with your left brain dominance. John Percival argues in his introduction to The Way of the Dollar:"

 

Because the systems constituent parts are mostly based on human behaviour which doesn’t change, not on fashion, we can be confident it will continue to work.

 

The financial markets, as anyone familiar with them knows, are deeply paradoxical. They have a logic of their own which is why in a way the opposite of normal logic. Hence the market adage “sell on the news” applies to good news not bad news. Hence other bits of market lore like “a bull market climbs a wall of worry: a bear market flows down a river of hope.” Markets do whatever they need to do to confound the greatest number of people.

 

This happens because prices reflect expectations. If everyone expects unemployment to rise, or a trade balance to fall, or inflation to remain steady, there is no intrinsic reason why they should be wrong: the expectation doesn’t affect the outcome. But if everyone expects shares to fall, or the dollar to

• Language: English
• Publisher: BookRix
• Release date: Aug 25, 2020
• ISBN: 9783748755005

Book preview

TABLE OF CONTENTS

EDITOR'S NOTE

READERS' TESTIMONIALS

ABOUT THE AUTHOR

PREFACE TO THE WEB EDITION

INTRODUCTION TO THE PRINTED EDITION OF 1991

PART 1

Chapter One - BACKGROUND

Chapter  Two - HISTORY OF FLOATING

Chapter  Three - EXPERTS CONFOUNDED

Chapter Four - INTEREST YIELDS

Chapter Five - TURNING POINTS

Chapter Six - USING CHARTS

PART 2

Chapter Seven - BASIC TRADING

Chapter Eight - MASTER TRADERS

Chapter Nine - YOUR FIRST TRTADES

Chapter Ten - EXITS AND ENTRANCES

Chapter Eleven - WHO ARE YOU?

GLOSSARY

SHORTLIST OF HIGHLY RECOMMENDED BOOKS

EDITOR'S NOTE

Note:

This eBook is a guide - and serves as a first guide. 

In addition, please get expert advice  from this  general inroduction to the futures markets:

The Futures Game, by Teweles and Jones.

Recommended overview of futures trading. McGraw-Hill, 1987; paperback ISBN 007063734 2.

Further recommended reading is listed in the last Chapter: SHORTLIST OF HIGHLY RECOMMENDED BOOKS

The Way of the Dollar was written in 1991, yet none of John PERCIVAL's principles of trading currencies for profit have changed! The D-Mark was replaced by the EURO in 1999/2000, the rest of the major currencies remained and are still quoted mainly against the Dollar.

Between 1989-1996, John Percival's currency portfolio at Chescor Capital (1987-2008) went from $1 million to $800 million. All his trades were explained in real time in his bi-weekly Currency Bulletin and Weekly Flash (1985-2017) part of which is still available in an online archive at currencybulletin.com.

The original illustrations provided by Datastream relate to market periods prior to 1991 and have purposely been kept mostly unchanged except for instances where the use of colours improved the legibility of the original black-and-white images (where dotted and solid lines were overlapping). The few re-designed charts had to rely on underlying historic data being readily available.

The original black-and-white charts convey the original impression of the 1991 rendering.

For example, the chart above has been replaced with the chart below:

This chart conveys the steady fall of the Dollar after Nixon abandoned the Gold Standard in 1971.

Since many pre-1991 economic data are not readily available – as they were then – only a few charts are re-designed and rendered in colour (a scope not available for the 1991 initial private printing).

Since 1991 the Dollar has moved in both directions, up and down, but the sentiment-based, contrarian thinking taught in The Way of the Dollar still applies:

Following a consistent contrarian sentiment-based approach works because it is founded on immutable human nature. The point about sentiment is that it's always there, always at work, and always offering an edge.

Highly acclaimed by readers and Currency Bulletin subscribers, this book has now become a classic and has been touted as the "Bible of Currency Trading".

 The private print edition* was gobbled up fast. This e-book will now be welcome to all participants in the exciting world of currency markets.

* An extremely rare copy is on amazon, signed by the author – offered privately as collector's item.

THE WAY OF THE DOLLAR

Copyright © John W H Percival.

All rights reserved.

Acknowledgements

To Datastream International and DynexCorp for the charts

To the University of British Columbia, Sauder School of Business, Pacific Exchange Rate Service provided by Prof. Werner Antweiler 

To Leo Chapman for proof-reading

To Marlene Harrison-Panholzer for proof-reading this e-book edition

Peter Panholzer, Editor

31 August 2020 

READERS' TESTIMONIALS

THE WAY OF THE DOLLAR

TRADING CURRENCIES FOR PROFIT

SYNOPSIS

As readers know, my approach to analysing the currencies – its method – is essentially anti-crowd. We look where the crowd is not looking for an underlying rationale for the direction of the main trend. And we use a series of contrarian* sentiment indicators designed to orient us in the opposite direction to the crowd. This method has worked well, and it is timeless so it should always work. The method is OK. If we can have confidence in it and can apply it, we shall win.

Readers' comments:

The best advice on currencies you can hope to find (Harry D Schultz, Harry Schultz International Letter, HSL)

Has changed me from an on-balance loser to an on-balance winner (Tony Begg, Los Alamos National Laboratory)

Uncanny and awesome (Ben Roberts Ltd, London)

Has the courage of its convictions (Alan Moore, Director of Lloyds Bank)

Can demonstrably make money for me (P Triffitt, Devon, UK)

Very impressive (Claremont Economics Institute, Berkeley, CA)

An absolute must (Paul Rumsey, Bank of America)

Entertaining, witty . . . always useful (Tony Hourmont, Vienna)

Jack Crooks wrote:

My all-time favourite currency guy is John Percival (now retired and living comfortably in the French countryside I understand). My respect for his insights over the years is immense.

I have been a reader of John's newsletter for over 20-years. I have learned a great deal from him, through his writings. There is a wealth of insights which I took from a very beaten up copy of his book, The Way of the Dollar, published back in 1991.

Mr. Percival doesn't know this, but he was the only mentor I had in this market. I read his book from cover to cover to cover … pages are falling out … highlighted and notes everywhere. His book provides more insight every time you go back to it. And I go back to it often.

John Percival made a key point in the book that struck me – my belief in what matters when it comes to markets has little to do with trading success.  I believed I was well armed given my freshly-minted MBA in finance and economics.  I had already worked as a financial analyst and even did a stint in the never-never land of corporate strategic planning. Anyway, Mr. Percival's book opened my eyes, but at the time I still didn't understand just how valuable his advice was.

After years of trading and barking up all kinds of analytical trees, with major failure and moderate success in currencies, I went back to Mr. Percival's book.  This time I appreciated what was right there in the introduction:

Finally one had to see if there were other relationships which had any predictive value for currencies like inflation, trade, money supply, oil prices, economic growth, et al. So far, the conclusion is that few such relationships and none of the relationships that most observers seem to rely on are useful for predicting the dollar.

Say what? I thought to myself. Heck, I have all these so-called analytical skills and education and now I'm effectively being told by John Percival if you want to trade currencies and make money, you better pack up that degree and see the market for what it is, not what you think it is with your left brain dominance. John Percival argues in his introduction to The Way of the Dollar:

Because the systems constituent parts are mostly based on human behaviour which doesn't change, not on fashion, we can be confident it will continue to work.

The financial markets, as anyone familiar with them knows, are deeply paradoxical. They have a logic of their own which is why in a way the opposite of normal logic. Hence the market adage sell on the news applies to good news not bad news. Hence other bits of market lore like a bull market climbs a wall of worry: a bear market flows down a river of hope. Markets do whatever they need to do to confound the greatest number of people.

This happens because prices reflect expectations. If everyone expects unemployment to rise, or a trade balance to fall, or inflation to remain steady, there is no intrinsic reason why they should be wrong: the expectation doesn't affect the outcome. But if everyone expects shares to fall, or the dollar to rise, there is every reason why they should be wrong: because current share price levels already reflect the expectations of lower prices, and the current level of the dollar already discounts a rise. In other words, the expectation vitiates the outcome.

You can see why John Percival is an excellent mentor.

When I first got started focusing on currencies, I did my best to think only about what John Percival talked about in his book and push out all the smart rational analytical skills I was confident I had already learned. I didn’t realize the quality of this little book I stumbled upon; it was a true gem in the world of investment book wasteland where most reside, or should. I went on to do extremely well with my first real trading account.

ABOUT THE AUTHOR

John Percival belongs to that envied species of well-bred, articulate Englishmen who travel the world, try their hand at a variety of professions and thrive in every one of them.

 Born 1939 in Karachi – which was then British India – where his father worked for Shell Oil, Percival grew up in the family home in Gloucestershire in England. He attended public school (a British English for private boarding school) in Surrey and received a Greats degree in Latin, Greek, philosophy and ancient history at Oxford University.

After he spent a year wasting his time with a computer company, he started researching stocks for Eurofinance in Paris. Percival joined the Financial Times as a columnist for the Lex Column in 1967 for six years. After this he moved to an investment bank specializing in the Middle East. In 1975 he settled in Bahrain and became an entrepreneur himself, flying freight into the Gulf States and North Yemen.

This is where he came face-to-face with the foreign exchange markets at the hard end, when he contracted for his freight space in dollars and resold in local currencies. On one occasion, he had a Boeing 707 full of bits and pieces. A satisfactory profit margin on this might have been 5%, but unfortunately the currency fluctuation at the time went against him and cost him about 7%.

Intent on learning more about currency markets, Percival left the Middle East and moved to France in 1980. Travelling between rural France and London, he started publishing a bi-weekly eight-page newsletter. He also traded for his own account, specializing in the Deutsche mark, Japanese yen and Swiss franc.

Percival traded from his London-based firm, Chescor, running up the value of his currency portfolio close to $800 million.

John Percival retired from trading in 2017.

PREFACE to the web edition

It’s about thirty years since I started writing The Way of the Dollar (short TWotD), published by our advisory service Currency Bulletin (short CB), founded in 1982. Re-issuing it for the web has been a curiously time-consuming endeavour – for mainly technical reasons – even though I decided to reproduce it in its original form rather than in a revised edition. But of course times have changed.

Our methodology was settled in the mid-1980s and has remained fundamentally unchanged ever since. Up front, it has to be said that the currency markets have become highly ‘efficient’, by which we mean that the supposed price-sensitive information is effectively discounted in prices so that attempts to anticipate price movements in the major dollar parities on the basis of such information have, over time, tended to be no more successful than the throw of a pin. This concept sounds easy to grasp, but in practice people have great difficulty with it: even if they see it must apply in general, there often seem to be good reasons why it doesn’t apply in a particular case (where we think we have a special angle on the data; where we think it may not yet be discounted). We simply accept that it is a waste of time. The approach we adopted and set out in this book was to look elsewhere to an area of inefficiency in currency pricing which seemed to be consistently reliable.

The analysts out there are looking for the explanation for currency movement in future events – such as interest rate changes; or central bank actions; or shifts in economic growth. The degree to which any event is discounted in price and the scope for insight or inside knowledge in such areas is small, and not too susceptible to systematic study. In this, currencies differ from stocks, for example, where expertise can be acquired in the way of specialised knowledge of individual company affairs: ditto with certain commodities, I imagine.

The alternative is to concentrate on determining what it is that the crowd is expecting, which is what is already discounted in prices, and on evaluating the degree of the crowd’s commitment. Our theory is that this is where the most reliable inefficiencies in the currency markets are generated, when the crowd gets over-committed to a view of the future. And the degree of over-commitment can be gauged in various indicators of sentiment among currency observers and participants – the level of speculation and consensus, in particular.

Three basic assumptions were that 1) the crowd tended to lose money; 2) that it tended to be ‘right for the trends but wrong at both ends’; and 3) that therefore it would pay to go contrary to the crowd at the ‘ends’ or price extremes. None of the above was too contentious, but the assumptions take you nowhere unless you have a way of locating the price extremes. The formula we settled on was to define the extremes, not in terms of price but in terms of sentiment. The underlying equation was: a price extreme = an extreme of consensus + an extreme of speculation.

Naturally you can, at any moment, point to some other driving force like a divergence or convergence in growth rates; or a rising or falling stock market; or a shift in central bank policy, via intervention or interest rates. Recently, observers have put the finger on equity and direct investment flows. Any of these can be or seem to be the determinants of currency movements. Our contention was that this might be so, but that you were more likely to lose money following such episodic rationales than following a consistent contrarian, sentiment-based approach, which was founded on human nature. And it worked.

In two decades, there were a few periods when the ebb and flow of sentiment was distorted or overwhelmed by unpredictable forces. In the mid-1990s, the automated trading systems were disrupted by a series of ‘stop-loss-cascade’ moves that looked to have been triggered by other market participants. These movements were sufficiently violent to upset most methodical traders, but they nicely illustrated the critical weight of ‘set-up conditions’ – speculative positioning particularly – as an engine of price movement. The moment passed. Then in the second half of the 90's came the thundering horde of macro hedge funds, throwing many tens of billions at the yen carry trade (and dollar/DM). The disruption here was that the flows self-fed to an unprecedented degree as the size of the forex-active hedge money mushroomed – meaning that the extremes that we used to gauge got that much more extreme. That moment passed too. Hedge money has retired hurt from the currency markets, leaving them much slimmer.

The point about sentiment is that it’s always there, always at work, and always offering an edge to exponents who have been able to keep their finger on the pulse of sentiment (and this applies to all financial markets, and always has). The rationales that participants use to justify their expectations and positions are simply the raw material underlying the ebbs