George Soros is cited by many as one of the greatest traders of all time.
His audacious trades have made him a fortune much of which he dedicates to philanthropy causes.
He’s most often referred to as the man who broke the bank of England with his bet on the GBP way back in 1992.
Back then the GBP was part of the ERM ( European exchange rate mechanism ) which was created as a way to unite the economies of the countries in Europe.
To cut a long story short (because the details of how this came would probably put you to sleep) Soros, along with many other speculators, started aggressively shorting the GBP. In an effort to stop the wave of selling, the Bank Of England raised interest rates from 10% to 12%, with the hope that this would entice speculators to start buying pounds instead of selling them.
Their plan backfired, the traders saw the raising of interest rates as a sign of weakness from the government, rather than wanting to buy pounds they became more intent in selling them. As a last stand the Bank Of England raised rates again, this time to an unbelievable 15% ! ( Keep in mind, this whole event took place over the course of one day, to raise interest rates twice in a single day is unprecedented )
As the selling continued The Bank Of England decided to withdraw the pound from the ERM system, causing the Pound to drop significantly. In total, the government spent around 3.4 billion of taxpayers money trying to defend against the selling of the pound by the speculators, Soros himself was said to of profited more than 1 billion alone that day with many more trading firms also making large gains.
This huge profit catapulted George Soros to legendary status in the financial world. The title “The Man Who Broke The Bank Of England” is a title which continues to follow him to this day.
Over the years Soros has given lectures, authored books and frequently been mentioned on the news, all of these different appearances have given us the opportunity to learn alot as to how he trades and how he thinks. Today I’m going to dissect some Soros’s most well-known trading quotes into advice for you to use in your trading as well as giving you some information as to how he trades the markets.
Table Of Contents
- “I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.”
- “Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected.”
- “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.
- “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 markets.”
- “The only thing that could hurt me is if my success encouraged me to return to my childhood fantasies of omnipotence — but that is not likely to happen as long as I remain engaged in the financial markets, because they constantly remind me of my limitations.”
- “It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.”
- “Unfortunately, the more complex the system, the greater the room for error.”
“I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.”
The above quote is Soros saying how being able to know when your wrong on a trade is essential to having a long career trading the markets.
It seems to be a common theme among really successful traders that knowing when your wrong and more importantly, being able to admit when your wrong, is one of the primary components to successful trading.
A couple of days ago I released an article targeting the issue of removing the need to be right.
The article was specifically aimed at people who find it difficult to accept when their wrong on their trades, usually by holding onto losing positions. If these traders can’t come to terms with the fact that sometimes they’ll be wrong on their analysis of the markets, they will probably never a make it as a successful trader.
Another thing we can pick up from this quote is how George tells us he’s not a perfect trader.
Many retail traders assume really successful traders are perfect, they don’t lose money and each trade they place is a winner. Soros is freely admitting here that he has made mistakes, mistakes which probably cost him a lot of money when he made them. But he’s also saying by recognizing the mistakes he’s made has allowed him to survive such a long time trading the markets. Had he not made these mistake in the first place he would not have been able to learn the skills needed to survive 45 years in the trading industry.
“Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected.”
This quote gives us a small insight in to how Soros actually trades the markets.
Soros analysis focuses on understanding what other traders are thinking, if he can figure out what their thinking, then he can determine what event or market action they see as being obvious. By knowing this information he is able to trade in a way where he can make money by betting against what these traders do not expect to happen.
A good example of this method in action would be the CHF Crash in January 2015.
Before the CHF crosses crashed The Bank Of Switzerland came out and said they would not be removing the cap, therefore traders saw this as a good reason to buy. I mean, if they’ve come out and said their not removing the cap then there’s no reason to believe the market is going to drop below the cap price.
Someone like Soros would have analyzed this situation in terms of what the traders are thinking and what the fundamentals are saying. From his analysis of fundamentals he would have been able to determine that the cap is likely to be removed, he may not have exactly know when, but ultimately he knows the Swiss National Bank are going to remove it. From this point he would have analyzed what the traders buying CHF believe in regards to where they think the markets are going to go.
Eventually he comes to the conclusion the CHF is going to crash so he begins selling CHF, this is him betting on the unexpected. He knows traders are under the impression the Swiss government are not going to remove the cap, therefore if he bets against them ( by placing sell trades ) he knows when the Swiss do remove the cap all the traders who brought will lose, making Soros alot of money in the process.
This is how Soros trades, his analysis doesn’t really focus on the charts themselves its the traders creating what he sees on the charts. He understands the best opportunity to make money is when a significant amount of traders believe something is going to happen or continue. In market crashes the consensus is usually the markets are going to continue moving higher indefinitely, the traders taking part do not believe the market is going to drop because the market has been in an up-trend has been up for such a long time. Soros can easily recognize this, therefore if he spots something which will tell him the trend is unlikely to continue for much longer ( usually there will be some kind of fundamental reason ) he will start selling with the expectation that when the fundamental reason becomes obvious to everyone they will all begin selling too either by placing sell trades or closing buy positions.
“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.
This is the most revealing quote about how George Soros trades.
Instead of jumping into trends after they have already begin, Soros tries to catch new trends before they form.
This allows him to get a head start before all the other traders start piling in and begin pushing the market higher. This style of trading is very difficult to pull off, mainly due to the reason that markets will look really bearish when Soros begins buying.
If you look at all the different market events Soros has been involved in, you’ll see in nearly all instances he’s done the exact opposite to what you have probably done had you been put in the same situation
The Forbes article above shows how Soros made 4 billion in 2013 from the declining value of the yen.
The article states how Soros initially started selling the yen back in November 2012, look at the chart below and tell me if you would have brought here ?
The market was still looking very bearish back then, one look at the weekly chart would show you how long USD/JPY had been in a downtrend for ! To sell JPY when the majority of traders are still buying takes great courage and conviction in your opinions, something which Soros seems to have in spades.
Note: look at where USD/JPY is now, if Soros had made 4 billion by the end of 2013 I wonder how much he has made by now ?
“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 markets.”
The importance of what Soros is saying here cannot be underestimated.
Instead of having one central opinion of what you think the market is going to do Soros is instead suggesting it’s a better idea to come up with different scenarios.
By coming up with alternate scenarios Soros saves himself from getting locked in to having one idea of where the market is going to go or what it’s going to do, if he was to get locked in to having one opinion of where the market may go he can end up setting himself up for disappointment. By having different scenarios he is able to bypass the disappointment he would feel if the market does not do what he anticipated because he switches to one of his alternate views of the market direction.
“The only thing that could hurt me is if my success encouraged me to return to my childhood fantasies of omnipotence — but that is not likely to happen as long as I remain engaged in the financial markets, because they constantly remind me of my limitations.”
Omnipotence is where you feel as though your better than everyone else and nothing can stand in your way, Soros believes if he ever returned to these beliefs then his success in the markets would probably suffer because of it.
He believes its unlikely for these fantasies to return due to the markets usually proving a trade idea he had in the market wrong, if the markets are proving him wrong it tells him he is not as good as he thinks he is therefore he does not feel the effects of omnipotence.
“It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.”
This happens to be my favorite quote by Soros.
If there’s one quote which you should read each day before you begin trading its this one.
Alot of forex traders are always really concerned by their win rate, they want to win on every trade they place ( who doesn’t ) and they believe this is the most metric in judging how successful their trading strategy is.
What Soros is saying is, the number of trades you win or lose is irrelevant. What you should really be focusing on is how much money you make on successful trades compared with how much money you lose on unsuccessful trades.
Here’s a simple example of how win rate is a completely unnecessary statistic to follow when trading.
Lets say you place 10 trades, on the first 9 you win £10, so in total you’ve made £90. On the tenth trade, you end up losing £100 which means collectively after ten trades you’ve ended up going from a £90 profit to a £10 loss.
You have achieved a 90% win rate but have ended up losing money ! This just goes to show how unimportant win rate is when trading.
We could flip this example around too……
Lets say you lose £10 on the first 9 trades, then on the tenth trade you end up making £100. This means you only have a 10% win ratio but have still made a profit of £10.
Which situation would you rather be in ?
One where you’ve won 90% of your trades yet still lost money ? Or, one where you have lost 90% of your trades but made money ?
I know which one I’d rather have, do you ?
“Unfortunately, the more complex the system, the greater the room for error.”
Soros is emphasizing here how important it is to keep things simple when trading.
The forex markets are complex environments with thousands of participants all trading with different objectives. Some may be trading to make money, others might be trading to conduct business, with everyone trying to accomplish contrasting goals it makes figuring the markets out incredibly difficult.
The only way to combat the complexity of the markets is by simplifying certain concepts. The way I trade the markets is by understanding how other traders trade, whilst its impossible for me to figure out how every trader in the market trades, I know by learning the most popular strategies, I will have covered most bases and can relate the market movement to the traders implementing these strategies.