Have you ever thought what a Formula 1 Trade Race would look like? Whether you are an expert trader or, knocking at the door to get into Forex Trading, you have probably heard about how wealthy some people have become from trading on the Forex Market.
Formula 1 Racing is very similar in that there are just a few top drivers who can claim the title as number one in the world.
The characteristic winning qualities shared by an elite group of racing drivers and Forex Traders whose superiority and eminence stem from not only tenacity, but discipline and dedication that is both physical and mental.
The principles of racing cars and Forex Trading share similarities:
Every trader needs discipline – the ability to recognise when he/she has made a wrong move/trade and take evasive action to minimise the loss.
Winning Traders (and race drivers) have formidable courage; they know where to find the gaps in the market to make some outlandish trades, but always to stay ahead of the pack.
Traders, like racing drivers, should have an efficient and robust method of risk/reward management. Unless you are gifted and born with a clear insight into Forex Trading, controlling the risks means studying how the markets work and never leaving anything to chance.
Winning forex traders, like Formula One Race Champions, show an astuteness that allows a clearer acuity on when and how to use the market to their advantage.
NUMBER ONE WORLD FOREX TRADER
GEORGE SOROS – The man who “Broke the Bank of England” in 1992
George Soros made a million pounds in a single day of trading in what has become the most significant risk/reward of Forex Trading legend.
In 1992, the United Kingdom was included in the European Exchange Rate Mechanism (ERM), which required government intervention if the pound weakened below 6% against the Deutsche Mark. The ERM was part of the European Monetary System, set up in 1979 to maintain foreign currency stability by reducing the rate variables and normalise exchange rates before the formation of the European Union.
Britain’s responsibility was to maintain the value of the pound against the Deutsche Mark, which would involve either the BoE (Bank of England) raising interest rates or buying sterling or both. At that time, Britain was in a recession. Further, she had joined the ERM at a very unfavourable rate.
Soros knew this made the BoE vulnerable when it came to raising the interest rates, as it would be detrimental to the economy and would be a deterrent to any investment in the United Kingdom. The BoE economists acknowledged that the proper level of interest rate was much lower than required to support the pound with the ERM.
However, the British public maintained the value of the GBP buy buying up sterling in the weeks leading up to Black Wednesday, and Soros had used his Quantum Fund to build a significant short GBP position by borrowing from German investors.
Soros applies a theory of reflexivity; his belief that market participants shape market prices based on their perception of events rather than subscribing to the traditional economic theory that prices eventually align through natural equilibrium.
The Soros genius trade happened because there was enough speculation that the BoE could not help to sustain the value of sterling and would not be able to defend it against the Deutsche Mark, especially after the Chairman of the Deutsche Bank announced on 15th September 1992, the eve of Black Wednesday that certain currencies were under pressure.
Soros knew that if he sold, the BoE would be buying and this is precisely what happened.
Here is a simplified version of how it worked: Soros borrowed £1 million, to sell at the current rate GBP/USD 2.00 = $2 million.
When the rate reaches GBP/USD 1.50, he buys it back, paying $1.5 million and pocketing the balance of half a million dollars.
The pressure put on the Bank of England was immense; it was buying £2billion an hour. With the ERM in place, the BoE believed Bank of Germany would come to the rescue due to the ERM agreement: to maintain equilibrium among members of the ERM, those countries with the strongest currency must sell their own and buy weaker currencies. Therefore, the Bank of Germany was duty bound to sell Deutsche Marks and buy sterling.
However, the saga continued because the Germans did not come to the rescue because they had an interest in seeing the pound devalued. The Bank of England made futile attempts at shoring up the losses, but they had run out of foreign currency to buy any more sterling, which by the end of the day on 16th September 1992, forced the British PM to announce that the battle had been lost and the United Kingdom would be leaving the ERM.
To crown everything, George Soros did not spend a dime of his own money.
“The money that I made on this particular transaction would be estimated at about one Billion dollars. We very simply used the forward market – you borrow sterling, and you sell the sterling that you’ve borrowed. And then you buy back the sterling when the loan expires.” G. Soros
[Trading Strategies - 3 Biggest Forex Trades Of George (n.d.). Retrieved from http://forexillustrated.com/trading-strategies-biggest-trades-soros/]
Soros triggers the Asian Financial Crisis and wins a cool $790 million
George Soros gained notoriety a second time when he prompted the Asian Financial Crisis in 1997. On this occasion, Soros pocketed $790 million by going long on the USD/THB (Thai Baht) and short on the Baht. This trading strategy affected all the currencies in the Asian Pacific region: South Korea, Hong Kong, Malaysia, Indonesia, and the Philippines, among others.
The Soros trading strategy for Thai Baht:
Go short on Thai Baht, forces Thailand to spend $7billion to prop up the Baht. When the government effectively ran out of money to shore up their currency, Soros made his move by issuing a public warning to let people know that here was a problem and he dumped his baht, which ensured the fall of the fiat currency value, and triggered the crisis.
On 2nd July, the Thai Government pressured into giving up the Baht fixed rate, thereby floating the currency, putting pressure on currency issuers to maintain ratios by buying on the open market.
When they were effectively out of cash, the Thai Government had to seek intervention from the IMF (International Monetary Fund). With the IMF loan comes severe austerity measures and the devaluation of the THB against the USD from 25:1 (USD to THB) to 56:1. The result; Soros makes $790 million.
Governments were fearful that Soros would aim at their currencies, and when he did speculatively, trading became the order of the day with massive amounts of money being leveraged through borrowing, making it impossible for government’s financial infrastructure to withstand the onslaught.
You win some, and you lose some – but always stay on top seems to be part of the Soros business trading formula.
Although George Soros fund lost $300 million when he predicted that the US markets would keep on rising in 1987, he still managed to realise low double -digit returns.
The Soros magic failed again in 1998 and 1999 when he took a hit in the Russian debt crisis, and he lost $2 billion and then again the following year with a wrong prediction on the tech market. In this instance, having lost $700 million predicting a down turn in the tech bubble, he went big expecting a rise and lost almost $3billion when the market did finally crash.
George Soros won big with a $1.4 Billion pay out in 2013
Soros was back doing his stuff in 2011 when he jumped in after the Japanese economy had taken a hit following the tsunami of that year. Traders were waiting for a weakening Yen, which began at the end of 2012 when Shinzo Abe announced plans to devalue the Yen to boost trade and encourage economic growth for Japan.
Shinzo Abe was a PM candidate, and his speech signalled for investors to open significant USD/JPY positions, betting a steep rise of the dollar against the yen. The Soros Fund Management allocated $2.4 billion (10% of their fund) to short the yen against the dollar and with the down sliding yen, they managed to pick up a profit of $1.4 billion.
European Union countries criticised this massive devaluation of the Yen, not least because the lowering of Japanese currency meant the Japanese production costs would also be coming down, and this would make Japanese exports more competitive. The value of the dollar continued to rise, Bank of America (among others), and hedge funds took advantage of the excellent forex trading potential, and Shinzo Abe, hailed the hero of the day was elected PM on 26th December 2012.
Fortunately, for Japan, the move on the yen did not threaten the currency to the extent it had for Britain and Thailand in the 1990s, and the reason for this is probably because Japanese locals own the most substantial resources and debts of their country.
What we learn from George Soros
- Spot any future economic vulnerability and then go short on its currency just before the crunch comes, and there is a fall in fiat value.
- The highest potential for forex fluctuation and thereby, profit making is when there is a fixed currency rate between two currencies, such as the pound and Deutsche Mark and the baht with the dollar. In both these instances, the countries tried to minimise their vulnerability and weakness by buying their own currency in order to sustain the fixed rate – some would say; “like putting lipstick on a pig, it would still be a pig”!
- In the Japanese case, the signal to go short with the yen came with the announcement that the government would depreciate the fiat to boost the economy to attract investment and enhance their exports trade.
- What we see from the examples is that economic crises offer excellent opportunities for Forex Traders. However, trading in the same sphere as George Soros takes a big wallet and much nous and not everyone has the same deep pockets or the temperament.
Knowing when and how to manoeuvre in a highly charged forex trading market; how and when to get in or out of a trade, puts George Soros at Number One Formula 1 Trading Champion.
George Soros takes the Trading Chequered Flag
Here is a famous Soros’ quote in the Wall Street Journal; “I’m only rich because I know when I’m wrong” is a clear demonstration of his discipline and perception.