He's one of the world's greatest traders and became a legend when, his Quantum fund bet against the British Pound and broke the “Bank of England.” Here we will look at his trading strategy and the techniques, his trading is based on and get some trading tips, from one of the world's most successful traders.
The Theory of Reflexivity
“I contend that financial markets never reflect the underlying reality accurately; they always distort it in some way or another and the distortions find expression in market prices.”
George Soros rejects ,the idea of technical analysis that all fundamentals are immediately reflected in the price and contents that investors and traders distort the fundamentals by their individual biases. He opposes the view that any technical analysis of any kind, can predict what will happen in the future by knowing what happened in the past:
“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”
He sees any market including Forex markets as driven by investor opinion which cannot be mathematically modelled or predicted:
“Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception”
Learn to Think Against the Crowd
“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected”
Any successful Forex trader knows this is true. The quote really is about the art of trading contrary to the crowd. As the old saying goes “when its obvious, its obviously wrong.” Traders tend to believe the news and this distorts their view of the market or currency pair their trading. You can make money trend following but the really big money is made by correctly, trading signals on unexpected events which are not seen by other traders and George Soros was a master trader at doing this.
Treating Investment as a Business
If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”
Good investing is boring because you have to wait for the best trading opportunities and then simply hold them with no emotion – there is no fun in doing this, the fun is the end result of trading which is profit in the bank. Most traders could learn from this because most trade to much and want to feel the adrenalin rush of trading but this just gets emotions involved and sees them lose.
Making money with a Forex trading strategy is also about not working to many hours – if there are no trades around there is no need to be working. You only should trade the best set ups and this quote sums up the principle of a hard worker v a smart worker, who trades the markets:
“The trouble with you, Byron [Byron Wein – Morgan Stanley], is that you go to work every day [and think] you should do something. I don’t, I only go to work on the days that make sense to go to work. And I really do something on that day. But you go to work and you do something every day and you don’t realise when it’s a special day”
Money Management and Losses
“Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes”
Money management is the long term key to profits – if you want to make money, you need to manage your losing trades and make sure, you preserve the equity and this means not taking losses personally. Most traders end up taking losses personally and feel its a failing within them or they personalize and get angry with the market. Instead of getting emotional about their losses, they should simply see them as a route to long term profits. You will have losses because the market by its very nature, will give them to you so just take them and make sure, you don't let them run out control.
George Soros has had some huge losers but that doesn't matter, to any serious trader because so long as your winning trades are bigger than your losing ones, you will make money over the longer term.
Advanced Techniques and Complex Trading Systems
“Unfortunately, the more complex the system, the greater the room for error.”
Anyone who think George Soros uses a complex trading system, only need read the quote above to see he doesn't. The reason for this is when trading Forex or any other investment market we are dealing with chaos – not order. Trading the markets has nothing to do with insider secrets or a set formula which can win all the time with no losses. Trading successfully is all about observing the reality on the chart and seeing, each unique situation and reacting to what you see:
“Making an investment decision is like formulating a scientific hypothesis and submitting it to a practical test. The main difference is that the hypothesis that underlies an investment decision is intended to make money and not to establish a universally valid generalization.”
Learn to think about your trading and don't trust, any other judgement but your own. If you have a simple set of trading rules and are confident in your trading systems edge over the market, you can apply it with discipline and enjoy success.
“How good are markets in predicting real-world developments? Reading the record, it is striking how many calamities that I anticipated did not in fact materialise. Financial markets constantly anticipate events, both on the positive and on the negative side, which fail to materialise exactly because they have been anticipated”
If you want to be successful at trading currencies, you need to understand not to bet on the obvious trade or the trade that feels easy – your job is to work out what other traders will do,to the best of your ability and react to the way they trade. Soros in his theory of reflexivity, gives us a methodology which in my view, gives us a greater understanding of market movement. If you study the theory and all the quotes above, you can incorporate the theory and the simple trading tips above and incorporate them, in your own strategy and make bigger profits.