Forex trading involves buying one currency and selling another at the same time. As a result, forex traders quote currencies in pairs such as EUR/USD, USD/JPY etc. The exchange rate denotes the purchase price between the two currencies. For example, the EUR/USD rate denotes the number of USDs that you could purchase with one Euro. If you feel that the EUR will increase in value against the USD, you purchase Euros with US Dollars. If the exchange rate increases as anticipated, you sell the Euros and realize your profits. If the reverse takes place, you bear the losses.
The Impact of George Soros on the Forex Trading Market
People familiar with the world of forex trading might have heard of George Soros. Known as “The Man Who Broke the Bank of England”, this Hungarian-born American investor made a huge profit by speculating on currencies in 1992.
In the months leading up to September 1992, Soros acquired a huge position in pounds sterling. He had noted the unfavorable position at which the United Kingdom had joined the Exchange Rate Mechanism. The government of the United Kingdom had been reluctant to float its currency. Nor had they been willing to raise interest rates to levels comparable to those of other European Exchange Rate Mechanism countries. As a result, the British interest rates were hurting their asset prices and inflation soared.
Finally, the United Kingdom withdrew from the European Exchange Rate Mechanism. The government also devalued the pound. Soros, who had been anticipating this development, ended up selling short over $10 billion in pounds. His profit amounted to over $1 billion – earned in just one day.
The Forex Trading Plan – The Cornerstone of Your Trading Strategy
The example of George Soros encourages many people to enter the world of forex trading. They aspire to get rich as quickly as possible. However, to be successful in forex trading, you need a written trading plan. Here is a list of the aspects you need to consider when you create a trading plan.
1. A positive affirmation about when you should enter a trade or exit from it
2. Your short-term (e.g. defining your monthly profits) and long-term goals (e.g. trading account value)
3. The definition of your risks or exit criteria
4. Your trading strategy including aspects like:
- Analyzing the market conditions
- Determining the core daily support and resistance levels by using charts
- Trading obvious and confluent setups by scanning the charts for price action signals
5. Your money management strategy including aspects like:
- The risk and reward per trade i.e. the dollar amount you’re fine with losing per trade or the realistic reward in the existing market conditions
- Your long-term strategies for withdrawing money from your account
6. Aspects you need to refer to regularly i.e. the major currency pair, trading times etc.
7. A review to assess whether your strategy is sound or whether it carries too much risk
8. Another positive affirmation
Your forex trading plan might not guarantee success. However, it helps you document the circumstances in which you trade. This enables you to identify the strategies that work and to re-assess them according to the changes in market conditions. Over time, fine-tuning this plan will help you achieve the goals you had established when you began forex trading.
It took Soros several months to prepare for the occurrence of the eventuality that he foresaw. Effectively, that groundwork helped him earn a million dollars in a single day.