All traders aim to maximise profits and minimise their losses. In a market, there are always winners and losers. Nevertheless, some traders can earn returns up to millions of dollars annually. Even fewer of them can make up this amount in a short time. Many people wonder if they just got lucky or have figured something out that most do not.
Below are the three most famous forex traders. We will explore their trading achievements and investigate the strategies they employ to win most of their trades.
George Soros is arguably the most famous forex trader of all time. He is a short-term trader renowned for his achievement known as “breaking the Bank of England” in 1992.
At that moment in time, the Bank of England was desperately trying to peg the sterling pound against the Deutsche mark as a part of the ‘exchange rate mechanism’ (ERM). The Deutsche mark was naturally at a higher exchange rate. Therefore, they did everything they could to increase the exchange rates of the sterling pound.
This includes selling foreign reserves to buy their own currency to increase the demand. In addition to this, the central bank of England uses a contractionary monetary policy by increasing interest rates to attract foreign investors. However, this comes at a cost to the economy. Citizens will prefer to save instead of spending. The decreased flow of money led to damage to England’s economy, and it was inevitable that they would have to abandon the ERM to save the economy.
George Soros was quick to realise this. He used his Quantum fund to establish a sizable, initial short position. He accumulated to this position after the German Bundesbank made a statement that suggested some currencies are coming under pressure as a result of the ERM. The hint was too obvious to miss. Soros went all in.
When the UK finally announced that it would no longer follow the ERM, Soros’ short position profited him billions of pounds.
What were the main takeaways from Soros’ successful trading career and his peak on Black Wednesday?
Soros’ philosophy surrounds a well-known concept amongst investors: risk vs reward. When we analyse the risk vs reward of any trade, it is important to understand the political and economic events that could have an effect on the exchange rates. Moreover, movements in the market are the results of people’s cumulative perception of the market.
In this situation the risk was relatively low, and the reward was comparatively larger. This was because the Bank of England struggled to maintain high-interest rates. Their foreign reserves were depleting, and the economy was dwindling. At the same time, quite a few people see the same as George Soros and obtained a short position. This will put more downward pressure on the pound sterling. It is improbable for the exchange rate to go up; therefore, Soros’ short position was a winning trade.
Stanley Druckenmiller is a forex trader in the same generation as George Soros. He worked with Soros at the same quantum fund for over a decade. Not only known for his cooperation with Soros in the huge Black Wednesday achievement, but he also created his own fund called Duquesne Capital and managed it for huge profits. By the time he retired, Druckenmiller had accumulated a net worth of around $2 billion as his Duquesne Capital was profitable annually.
According to Drunkenmiller, his strategy is rather conservative. The primary focus is on the preservation of capital. Maximise the opportunity when trades are going well and minimise the losses when it doesn’t. When trades were going well or in predictable market conditions he would increase his position and leverage. The essence of this strategy is timing and choosing the right currency pairs. He said that “there are a lot of shoes on the shelf; wear only the ones that fit.”
Bill Lipschutz is an interesting case. He never had forex trading experience until he made his breakthrough at Solomon Brothers in the 1980s. At this time, he makes $300 million per year for his firm. He also made $250,000 from $12,000 he inherited from his grandmother when she passed away.
Lipschutz has also been open about the fundamentals of his trades. He believes the psychological side of forex trading is extremely important. Therefore, you need to understand the psychology of the market to make predictions on any shifts, make a good analysis and be the first to jump on it.
The secrets behind his big profits are a little unorthodox—Lipschutz advocates for trading against market consensus. Continue to build on your position when the market is supporting your hypothesis and exit quickly when it goes against it.
All three of these forex traders have achieved magnificent feats throughout their careers. However, each of them has its own strategies and priorities when it comes to trading.
Whereas George Soros and Bill Lipschutz focus primarily on external factors such as political, economical events or traders’ psychology,
Druckenmiller focuses more on fundamentals such as preserving his capital and choosing the right currency pairs to trade.
Despite their different priorities, all of these forex traders agree on some unwritten laws in forex trading. They do not see trading as gambling therefore; they will only make decisions based on market conditions instead of emotion. Lastly, they have a high sense of flexibility. Most of the time, they are disciplined and stick to their trading plans. However, they are not afraid of changing their positions if an opportunity arises.