Billionaire Currency Trader: The Man Who Broke the BOE
Article Summary:
George Soros netted a profit of over 1 Billion
Euro
in 1992. Find out more about his strategy and what he is trading today.
Remember
Black Wednesday
? On September 2nd,1992, George Soros became known to history as the “Man who broke the Bank of England.” On that day, George Soros
sold short
more than $10 billion in Pounds Sterling netting a
profit of around 1 Billion
Euro
.
Let’s delve further into Soros’ strategy, philosophy, and
his current moves.
Strategy
Simple economics:
Soros trades within boundaries derived by rules. By doing so and by understanding the dynamics between economic giants in Europe, he puts the pieces together. Considering interest rates fluctuations and government interventions, Soros detected an emerging bubble.
He borrowed pounds, sold them for Deutschmarks; and overflowed the currency market with excess supply of pounds. This led to Pound devaluation.
1. Play by the rules
2. Detect an emerging bubble
How did Soros know?
In September 1992, United Kingdom’s government was between two crossroads on whether to raise their
interest rates
to the levels of the European Exchange Rate Mechanism (ERM) or to float its currency. Soros foresaw
pound
devaluation because: UK would have to withdraw the pound from the EERM because the
Bank of England (BOE)
would not be able to keep GBP exchange rate above the agreed limit. Therefore, the pound would have to be devalued.
Soros was aware that Deutsche Bundesbank, German’s Federal Bank, favored Sterling and Italian lira devaluation. Secondly, high British
interest rates
would be calamitous towards UK’s asset
prices
. Therefore, prior to September of 1992, he began borrowing Sterling and converting them into a concoction of French Francs and Deutschmarks.
On September 16, 1992, the British Pound was forced out of the ERM.
Philosophy
George Soros takes advantage of the
power of prediction
from a slightly different angle. Soros is a pattern-detector: he looks for patterns of errors. He applies his knowledge regarding a social theory–
Reflexivity
—towards his financial strategies. This theory is based on the principle within the Thomas Theorem: “situations that men define as true, become true for them”. In other words, essentially, our decisions are based on the predictions we make ourselves, therefore the predictions become fact.
Analogously, within the arena of economics and financial markets, individuals’ predictions about the market can possibly lead to prediction-biased decisions and actions.
Here George Soros enters;
detects an emerging financial bubble; predicts people’s actions; and then he goes against just that
.
We all look for patterns to make our executions; however, discovering the minority financial strategy leads to the highest reward.
Soros 2013
Soros latest trade has been betting against the Japanese Yen. He has made almost $1 Billion on these trades since last year, as he is shorting the
Y
en
. On April 4th, 2013, after Japan announced monetary easing measures to achieve a 2% inflation target, the
Yen
fell more than 3 percent against the dollar.
Soros says “If
the Y
en starts to fall
, which it has done, and people in Japan realize that it is liable to continue, and want to put their money abroad, then the fall may become like an avalanche,” on CNBC.
Learn Forex –
USDJPY
Weekly Trend
Created using FXCM’s Marketscope 2.0 charts
Today you can take advantage of the weakening Japanese Yen just like the currency trading giant George Soros! As Japanese Yen pairs move towards higher highs, traders can utilize a breakout strategy.
Don’t have a strategy? FXCM offers a series of automated breakout strategies implementing buying, selling, and exit logic considering current market conditions. This is available to download through the FXCM App Store–Find out more about our
Breakout 2 strategy here
.
–Written by Sunaina Rajani,
Education
E-mails can be sent to [email protected]
