In order to succeed in any field, studying how successful people operate is critical. George Soros is considered by many to be the most successful Forex trader. He is known as the man who broke the Bank of England and pocketed a billion dollars.
George Soros Forex trading strategy uses a combination of deep understanding of fundamental factors and their effect on asset prices. He used tried and true principles of trading and entered the market when others were fearful and made his exit when others were overly optimistic. Understanding George Soros fx trading strategy is critical in learning the core principles of fundamental analysis and how opportunities can sometimes be found in the unlikeliest of places. George shows how courage and deep understanding of the markets can lead to amazing results. Let’s dive deep to find out more about George Soros strategy in FX.
Core features of George Soros’ forex strategy
- George Soros has followed the “reflexivity theory”, which states that market participants directly influence the fundamentals of assets and their irrational emotional reactions provide ample opportunities on the market
- He uses political knowledge to make decisions on the market. Which was the reasoning behind his famous trade against the Bank of England, who had planned on hiking interest rates in 1992, but the trade forced them to devalue the pound, which netted Soros about $1 billion in profit
- Soros uses probability and market data to make decisions and beat the market. He frequently tests his theories with smaller investments and increases the scope if they prove to be effective
- The technical indicators used by George Soros were incredibly simple and often limited to simple support and resistance points on a chart
- The core principle used by George Soros is to effectively mix fundamentals with technical analysis and look for opportunities before they hit the headlines
FX trading strategy of George Soros
To understand George Soros’ forex strategy, we must first consider the financial background and trading experience that developed the philosophy that led to his success.
George Soros started his first hedge fund in 1969, called Double Eagle. In 1970, he started another fund, which later became the Quantum Fund. At its founding, Quantum Fund had assets of $12 million, which has now reportedly grown to over $27 billion.
George Soros was always known for his daring trades and this is especially evident in his trades against the pound in 1992 and against Asian currencies, such as the Thai baht in 1997 – Trades that made him $1 billion and $790 million, respectively. However, this does not mean that all of his trades were successful. One such example is the Malaysian currency crisis and the “Dot Com bubble”, which resulted in significant losses for his hedge funds.
The theory of reflexivity
The primary philosophy of George Soros has been “the theory of reflexivity”. Which simply states that traders and investors will not always act rationally and that their emotions will lead to irrational decisions. This creates great opportunities on the market to the more astute traders who can capitalize on their mistakes. Traders may overbuy or oversell due to panic on the market, which is the best time to enter and make major trades. This is also in line with Warren Buffett’s approach, which states that greed is the best time to sell and panic is the best time to buy.
Traders need to remain alert to catch such scenarios, and this is the core principle behind George Soros’ trade decisions – he is always looking out for booms and busts on the market.
George Soros is known for sticking with fundamental analysis and using very lean technical analysis in his trades. This is partially due to the fact that he trades in high volumes, which is not ideal for short-term trades with short intervals.
Many technical indicators may confuse traders and could even contradict each other on a chart. High-volume trades can render many indicators obsolete, which is why institutional traders and investors choose not to rely on them too much.
Knowing the economy behind a currency and the political figures behind major decisions has been key in the success of George Soros.
Global macro strategy
Soros’ funds are known for using a global macro strategy, which involves making massive trades during financial bubbles and boom and bust cycles. Macroeconomic analysis involves using data such as GDP growth, unemployment rates, consumer spending, inflation, etc.
George Soros has long been an advocate of using real-world data to follow market sentiment and find opportunities that are being overlooked by other institutional traders.
To better understand the George Soros FX trading strategy, let’s take a look at the Thailand trade.
One of the most popular trades made by George Soros came in 1997, when he made a bet against the Thai baht using USD/THB forward contracts. His trade triggered the Asian financial crisis, which spread beyond Thailand to South Korea, Indonesia, Malaysia and Hong-Kong.
Here’s how it happened:
- Soros opened a short position on the Thai baht
- Thailand spends around $7 billion to protect the currency from speculators
- Soros sells his entire baht position and warns of a coming market crisis
- Thailand allows the baht to float freely and asks for help from the International Monetary Fund (IMF)
- Thailand is forced to take austerity measures to secure a loan from the IMF
- Baht falls sharply from 1 USD to 25 baht to 56 and Soros makes $790 million
In this George Soros forex strategy guide, it’s worth mentioning the USD/JPY trade. Which was following the 2011 tsunami that hit Japan.
The tsunami dealt serious damage to the Japanese economy and the candidate for Prime Minister, Shinzo Abe, promised to weaken the yen to boost Japanese exports.
A number of US traders jumped onboard and shorted the Japanese yen. These huge bets against the yen devalued the currency and made Japanese exports cheaper, which boosted economic activity. Shinzo Abe won the election in 2012.
This move was heavily criticized by EU officials, who claimed that an artificially devalued yen gave an unfair advantage to Japanese exports.
In total, George Soros made around $1.4 billion from the short position, in which he had deployed 10% of the total capital available to his funds.
Pros and cons of George Soros’ forex strategy
Forex strategy by George Soros might seem simple and easy to follow. However, these trades are highly difficult to make as they require deep understanding of fundamental factors and having a courage to make decisions quickly.
- George Soros used a very limited amount of technical indicators in trading
- The strategy uses sound fundamental analysis and political context to gauge future market performance
- The strategy has made George Soros one of the most renowned traders in history
- Traders have access to historical data to analyze the trades made by George Soros
- The strategy is not easy to emulate for traders who lack the expertise and experience
- The historical context and what conditions and regulations markets operate in have changed drastically over the decades
- Much of the decision-making process used by George Soros remains undisclosed
Example of George Soros’ forex strategy
To illustrate how George Soros used his trading experience with political acumen to make trading decisions, traders need to look no further than the most famous trade. Soros is known for – The Bank of England trade, which led to him being dubbed as “The man who broke the Bank of England” by the media. The trade is still widely regarded as one of the greatest trades in the history of financial markets.
The Bank of England trade
George Soros and other big traders exploited a weakness in the British monetary policy and September 16, 1992, is now known as “Black Wednesday”. The selling pressure was so high that the pound had to be removed from the European Exchange Rate Mechanism.
The pound was pegged at a fixed rate to the German mark at that time. However, the reunification of Germany meant added pressures for ERM currencies to be kept within the agreed limits.
The British economy was in a bad shape at the time, which meant that the pound was hit the heaviest by the selling spree. George Soros was aggressive in his decision to short the pound – placing trades by the minute as the currency fell further down. The Bank of England tried to step in and buy as much GBP as they could with their foreign exchange reserves. Which proved futile, as they simply did not have the necessary reserves to fix the situation, and the pound collapsed.
The trade was so influential that it forced the UK to leave the ERM. The trade netted George Soros around $1 billion in profit.
This trade is a great example of using economic and political foresight in trading decisions, which has been the backbone of George Soros’ forex trading strategy.
FAQs on George Soros’ Forex strategy
How does George Soros trade Forex?
George Soros is known for relying on fundamental analysis and identifying boom and bust cycles across global markets. This ability has allowed him to make wildly successful trades, such as the bet against the GBP in 1992 and against the THB in 1997, which netted him $1 billion and $790 million in profit, respectively.
Is George Soros Forex strategy any good?
Yes. While emulating the success of George Soros can be next to impossible, any trader can learn from his use of fundamentals to make sound financial decisions and identify great opportunities in the market.
What was George Soros’ main FX trading strategy?
George Soros used a global macro strategy, which meant that his fund monitored the global markets to find bubbles and make trades during times of high uncertainty. This global macro strategy was the reason for his successful trades during the Asian financial crisis of the late 90s.