The two most important parts of forex trading are entering the market and exiting it, and taking a disciplined approach is key to success when applying for an instant funding prop firm.
Successful trading is about playing the long game, managing and observing the market, employing strong risk management fundamentals and avoiding taking huge risks without justification.
All of these traits were found in one of the greatest forex traders of all time, but what is just as fascinating and educational about his career are the reasons why he left the market and his much less successful career trading technology stocks before he left the Quantum Fund.
The Man Behind The Man Who Broke The Bank Of England
One of the most pivotal forex trades in history is the shorting of the British Pound on Black Wednesday 1992. This event arguably changed the course of British politics with repercussions still felt today, and made George Soros’ Quantum Fund a billion dollars.
However, what is less well known is the importance of Stanley Druckenmiller, George Soros’ right-hand man, who was the person who spotted the potential weakness of the British economy within the European Exchange Rate Mechanism that made a short play so effective and lucrative in the first place.
After relaying this to Mr Soros, he encouraged Mr Druckenmiller to take a huge short position worth as much as $15m. Quantum’s position was worth the entire size of the fund, and had the pound rallied it would have ruined everyone involved.
Mr Soros was described as the man who “broke” the Bank of England as a direct result of this, but Mr Druckenmiller’s contribution was significant, and throughout the 1990s the pair would take part in several other major forex trades, not all of which were as successful.
Unfulfilled Prophecies
The belief amongst economists, including Paul Krugman, was that Quantum Fund was not only using their significant capital to profit from currency crises but was attempting to aggressively short currencies seen to be vulnerable in order to manifest more chaotic economic circumstances.
However, whilst making money on the pound in 1992, and the Thailand baht and Malaysian ringgit during the Asian currency crisis of 1997, neither Mr Druckenmiller nor Quantum Fund were untouchable.
He attempted to short the Japanese yen in 1994, two years after the end of the Bubble era and at the start of a deep Lost Decade in Japan.
However, Quantum had shorted the yen on the belief that the dollar would continue to gain against it, but when the yen had a one-day increase of five per cent, the fund lost $600m that same day.
In 1998, Russia defaulted on its debt and devalued the ruble, which cost Quantum another $2bn in various investments, although given the collapse of other firms such as Long-Term Capital Management, Mr Druckenmiller et al escaped relatively easily given that their overall assets
were up nearly a fifth on the year.
However, the huge crisis and the earthquake it made to the financial world, combined with a failure to short the Hong Kong dollar out of its peg with the United States dollar the same way Quantum had successfully done with the pound and the European ERM, ultimately caused the hedge fund to largely exit forex.
Leaving His Speciality
Stanley Druckenmiller largely left forex at this point and ended up investing in technology stocks, taking advantage of the dot-com bubble at the time.
However, whilst his timing was excellent with the pound and his patience proved critical in making a profit on the unified Deutsche mark following the fall of the Berlin Wall, his timing in the technology sector was significantly worse.
His mistake was to be correct at the wrong time. His fundamental investment strategy is to “follow the puck” to where it is going rather than where it currently is, or to invest based on the medium-term future rather than its state in the present.
He decided to short internet stocks based on this philosophy but lost $600m as the overvalued companies continued to grow their stock prices. He eventually changed course on a short-term basis and made it all back and then some.
After choosing to sell in early 2000, he rejoined the market an hour after the peak, losing $3bn in less than six weeks, ultimately leaving Quantum in the process.
His biggest mistake was to apply his exceptional skills honed in forex to a very different market, and then succumb to fear of missing out once it did not work.