George Soros: Forex Trading Strategy & Rules
The Man Who Broke The Bank of England
George Soros is famously known as “the man who broke the Bank of England.”
He gained international notoriety when, in September of 1992, he risked $10 billion on 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 dollars.
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%.
Key Learning Points:
George Soros trading rules
Is George Soros a forex trader
How did George Soros trade forex
What is Soros investing in now
Top 10 Trading Rules Explained
Trading Rule 1:
“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 significant problem with Forex traders. The average 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.
Trading Rule 2:
“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.
Trading Rule 3:
“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.
Trading Rule 4:
“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.
Trading Rule 5:
“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.
Trading Rule 6:
“The worse a situation becomes, the less it takes to turn it around, and the bigger the upside.”
Think about the latest stock market hype or cryptocurrency hype. GameStop was a big one, there was so much hype that caused the price to spike.
Trading Rule 7:
“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.
Trading Rule 8:
“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.
Trading Rule 9:
“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.
Trading Rule 10:
“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.
Is George Soros a forex trader
Most forex traders don't realise that George Soros is actually one of the worlds greatest forex traders, the best of the best. How did he become the best forex trade in the world?
During the late 1990s at the time the British Pound was pegged against the German Mark. This peg meant the UK wanted to make sure the value of the British pound stayed above 2.7 German Marks. This exchange rate mechanism was deadly... Germany was a stronger country. The UK tried really hard to stay pegged against the German Mark and this created high interest rates and high inflation.
During this time, many investors including George Soros started to speculate and bet against the Pound thinking they can't maintain this peg above 2.7 Marks. These short positions started to add up. The Bank of England responded by raising interest rates even further! This was a tactic to try and attract investors into the currency by creating buying pressure.
However, what happens when you have high interest rates? You need to pay the buyer right. For example, when you take out a mortgage you pay a certain amount every month, if interest rates increased your mortgage payments could increase too.
This is the problem the UK faced, paying out interest is a huge cost. Britain realised this too late realised that it would lose billions trying to prop the pound up against the mark. What did this lead to? It led to the UK withdrawing from the exchange rate mechanism (the peg) and the British pound crashed.
George Soros made $1 billion during the crash.
How did George Soros trade forex
The method that George Soros follows is called the Global Macro Strategy, it's one of the most successful strategies to trade currencies (forex), bonds and even some equities. It's also known as using fundamentals to trade... something that most traders seem to miss out in their analysis. It's not just trading a piece of news like a noob!
The main goal is to get a holistic view of the global economy, influential events, politics and key economic data. All these factors affect currency value which George Soros saw and utilised.
If you're interested in learning the Global Macro Strategy we do have an free introductory class on the subject to give you a taster on what it involves.
This type of fundamental analysis requires lots of analysis on real economic data rather than price. Technical analysis on the other hand relies on just price data. Soros doesn't use technical analysis...instead he focuses on the fundamentals.
What is Soros investing in now
3 Stocks George Soros Invests in
George Soros is the primary adviser for Quantum Group. What does he invest in? Well... the Quantum fund which he primarily advises investments in a large range assets. This ranges from public equity, fixed income, forex, energy, retail and many more.
Soros Fund Management had a 13F filing which reported on Sept 30th 2020 the fund added 46 new stocks to their portfolio. One of the main investments was chip makers and consumer discretionary stocks.
1. NXP Semiconductors NV
Soros Fund bought 70,000 shares in the chipmaker NXP Semiconductors as the semiconductor industry saw 5.8% year on year growth in sales on September 2020. One of the main reasons? High demand for smartphones and other smart technology.
2. Walt Disney Company
One of the core reasons why George Soros and his fund bought "DIS" was because of the panic causing the Disney stock to slide over 4%. The vaccine announcements saw the Disney stock spike 11% straight afterwards as this type of news is super bullish for things like Disney Land.
3. Maxim Integrated Products Inc.
Soros Fund bought 294,369 shares of MXIM during Q3, giving it a position valued at $19.90 million on September 30 according to Yahoo Finance. Maxim earns a lot of revenue from China, 35.7% of its revenue coming from there. This semiconductor company is expected to grow as the earnings per share have been skyrocketing.
Now that you know the main rules and assets George Soros invests in you can take this knowledge away and apply it towards your own trading strategy. You're into forex and stocks?
Become a Global Macro Trader like George Soros Fund. Learn the methods they use to value currencies and companies.
