Learning From Legends: The Biggest Forex Trades In History
The forex market is the largest and most liquid financial market in the world, and it’s possible to make or lose a fortune in a matter of seconds. Of course, the majority of traders will deploy effective risk management strategies that enable them to make modest but consistent profits over time, rather than deploy high-stakes tactics.
This approach is regarded as the best way to become a successful prop firm trader, and in most cases you’ll need to prove that you can follow the firm’s risk management rules and operate within their drawdown limits. However, it’s interesting and educational to learn about those speculators who made the biggest forex trades in history.
How do forex trades make money?
Forex trading involves buying one currency while simultaneously selling the other, and speculators aim to profit from the changes in the value of the currency. In order to work out the probability of the markets moving in their favour, traders will take a variety of approaches.
These are often based on a mixture of technical analysis (such as price patterns and support and resistance levels) and macroeconomic trends (such as inflation, interest rates and other economic variables), as well as geopolitical events such as elections and international conflicts.
Most traders will use leverage (borrowed funds, such as from a prop firm) to increase their position size, and therefore the potential gains on their trades. However, this also increases the potential for making losses. Some of the most spectacular profits (and losses) in forex were made on highly leveraged trades.
‘Shorting’ means a trader will sell a currency because they believe the value is about to go down and therefore they will sell or avoid buying it, while ‘going long’ means that a trader believes the value of a currency will increase, and therefore they will be keeping or looking to buy the currency.
Without further ado, let’s take a look at these bold market manoeuvres, and the lessons we can take from them.
Andrew Krieger, 1987
Krieger is well known for his ambitious forex trades, and most of all for going short against the New Zealand currency in 1987 and netting a profit of over $300m for his company. During the stock market crash known as Black Monday, Krieger correctly identified the overvaluation of the NZD in the market and took up a short position.
George Soros, 1992
Perhaps the most famous trade of all that is still talked about today in awed tones was made by George Soros, AKA The Man Who Broke The Bank of England, in 1992. During the 1970s and 80s, the UK struggled to maintain stable inflation rates and this resulted in the government’s decision to join the European Exchange Rate Mechanism (ERM) in 1990.
The ERM was designed to stabilise exchange rates and eventually pave the way for a common currency for EU countries (the Euro). However, various economic and geopolitical factors interacted negatively on the value of the GBP, particularly against the stronger German economy and the impact of the country’s East-West reunification in 1990.
Britain’s scepticism about joining the Euro was also a contributory factor. The Bank of England raised interest rates in order to shore up the pound and attract more investors. However, influential investors such as George Soros were critical of the ERM system, and did not have faith in its ability to maintain a strong pound.
Therefore, Soros and others began to short the pound, drawing on his hedge fund to accumulate an enormous short position of $1 billion. This created an oversupply and drove down the market value of the pound. The British government responded by raising interest rates again and using its foreign exchange reserves to buy back pounds from Soros.
However, market sentiment shifted against the pound, and these measures were ultimately not enough to reverse the damage. Soros doubled down and increased his position size from $1.5bn to $10bn in mid-September, a day that came to be known as ‘Black Wednesday.’
The pound plunged in value against the German mark and the US dollar, and the government was forced to withdraw from the ERM. Soros made a profit of more than $1bn in a single day as a result of the pound’s collapse.
Soros won both praise and criticism for his audacious role in Black Wednesday. Arguably, his actions exposed pre-existing flaws in the system, and the resulting reforms may have ultimately helped to strengthen the UK economy.
Stanley Druckenmiller, 1992
Druckenmiller worked for Soros in the early 1990s, and was already his star trader. He was also early to pick up on the weakness of the pound, and he forged a different strategy to Soros, going long on the German mark. He also bought British stocks as he correctly predicted that the UK would have to slash lending rates when the pound collapsed.
A further element of his strategy was to buy up German bonds, as he correctly anticipated that German investors would move to bonds as stock growth faltered. This detailed strategy, based on a thorough understanding of economic and geopolitical factors, as well as technical analysis, netted Druckenmiller a multi-million dollar profit.
Swiss Franc Shock, 2015
Not all record-breaking forex trades result in massive profits: the forex markets are notoriously volatile, and can also create huge shockwaves and losses. One prime example of this was the Swiss Franc shock of 2015. Like the British, the Swiss did not join the Euro when it was introduced in 2002.
The Swiss franc (CHF) has traditionally been regarded as a safe haven currency, because although Switzerland is a small country, it is regarded as exceptionally politically stable and strong, with banks and governments taking a traditionally non-interventionist approach. The country constantly takes a neutral stance in foreign affairs, and inflation rates are low.
Furthermore, the Swiss National Bank maintains the world’s seventh largest gold stockpile. All these factors means that the CHF is considered to be a major currency and one of the most frequently traded currencies on the forex market, with a consistently higher value than the US dollar.
In view of the high status of the CHF, when the Swiss government announced that it was scrapping the currency peg of 1.20 to the Euro on 15 January 2015, it sent shock waves through the forex markets and the wider global economy. This was despite repeated reassurances that the country was committed to the Euro.
The CHF immediately appreciated in value by 20 per cent, which impacted Swiss importers and service providers and destabilised a historically stable economy. The sudden and unexpected move caused massive losses to businesses, because it was too expensive to do profitable business in Switzerland.
Even highly seasoned forex traders and hedge fund traders were blindsided by the move, with many traders losing millions of dollars and some brokers even going bankrupt.
This shows that even in the most stable markets, the most unexpected events happen. Strong risk management and diversification is crucial for survival when trading large position sizes with high leverage.
What can prop traders learn from record-breaking trades?
These legendary trades demonstrate both the potential for profits in forex trading, but also the necessity for thorough research and analysis, and an understanding of the wider market context of each trade.
The take home message is that if you’re going to make aggressive trades, then you need to take an equally aggressive approach to managing risk. You also need to have a clear head with the ability to filter out ‘market noise’, and impeccable timing because the markets can move fast.
Making unbiased decisions
For new forex traders, one of the biggest take-aways from these high-stakes trades is to learn how to make independent decisions that are not influenced by social media hype or emotionally driven. The most successful trades are always strategically driven, and ambitious strategies must always be underpinned by meticulous risk management.
When you progress to larger account sizes and can command higher leverage, it becomes more essential to be up to date with macroeconomic trends. Shocks can happen, even to strong currencies such as the Great British pound and the Swizz franc. Be prepared for anything, and think big but stay disciplined.