Updated: Apr 6
The Man Who Broke The Bank of England
George Soros is famously known as the “the man who broke the Bank of England.”
He gained international notoriety when, in September of 1992, he risked $10 billion on a single currency speculation when he shorted the British pound. He turned out to be right, and in a single day the trade generated a profit of $1 billion.
Soros went off on his own in 1973, founding the hedge fund company of Soros Fund Management, which eventually evolved into the well-known and respected Quantum Fund. Reportedly racking up returns in excess of 30% per year and, on two occasions, posting annual returns of more than 100%.
“I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.”
Understanding that he was not always right enabled him to cut losses short and position size right. This is a major problem with Forex traders. The normal trader always wants to be right, this creates psychological biases which overshadow cognitive errors that the trader makes. E.g. Not following rules correctly or holding onto losing positions.
“My approach works not by making valid predictions but by allowing me to correct false ones.”
Soros’ is flexible in his trades, he changes his mind and reverses positions when needed. He does not marry his trades. For the normal forex retail trader, this is quite difficult to do mainly because of the insanely short time frames they try to trade on. Professional traders hold trades from anywhere between 1-18 months, so they're working on the weekly/ daily time frame. This method Soros mentions is difficult for retail traders to do and will likely cause them losses unless they up their time frames.
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
George Soros knows that the key to profitability for him is more about big wins and small losses than his winning percentage. Many Forex traders are so fixated on winning percentages without realizing the risk reward potentials. Your Sharpe ratio should be at least 1. If it is not your strategy will inevitably fail. In simple terms this means that your rewards are always more than what you risk.
“The markets are always on the side of exuberance or fear. It’s fear and greed. Right now greed has the better of it, which is rather nice (for investors) as long as it doesn’t get out of hand,”
Market trends are caused more by the extremes of investors emotions than fundamental reasons. Understanding the concept of "money flow" and "Risk on/off" can help you trade Forex currencies when there is large uncertainty. Safe haven currencies like the JPY, CHF and USD can appreciate in times of uncertainty, whereas most other risk currencies will depreciate.
“Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes.”
The problem is not in a losing trade but failing to learn from the loss. Did you hold on to a losing trade? Did you take profits early? As a retail Forex trader you need to iron out the mistakes to become successful.
“The worse a situation becomes, the less it takes to turn it around, and the bigger the upside.”
The more extended a trend gets from its average the greater the odds of a snap back and reversion to that mean.
“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”
Systematic and profitable trading based on math and probabilities is usually not exciting and fun. Good trading is boring in almost all instances. Retail traders tend to find trading fun whereas the professional method of trading is boring. Professional traders in hedge funds have upwards of 50 positions open at any one time risking anywhere between 5-10% of their portfolio. They will then maintain these trades over 18 months adding to winning positions and cutting losses short. Retail traders on the other hand like to trade within a day.
“Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected.”
The obvious trade is usually not the profitable one. Profitable trades tend to be the one that is not expected and counter intuitive. This is why many hedge fund managers follow a contrarian view of the markets. Going against the view of the masses to snipe reversals.
“We try to catch new trends early and in later stages we try to catch trend reversals. Therefore, we tend to stabilize rather than destabilize the market. We are not doing this as a public service. It is our style of making money.”
George Soros trades with the trend until the end when it starts to bend. Trend trading over many months is what many hedge funds do, this is completely different to how retail traders trade. What you can learn from this is potentially increasing your time frame to daily/weekly to follow true market trends.
“The financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.”
George Soros doesn't like to predict what happens next but wait for a confirmation of what's expected to happen. This is a common mistake among retail traders where they jump the gun too early and get out too early.