George Soros: The man, the myth, the legend. If you haven’t heard of him and you’re a trader, you are missing out on a lot of very valuable insight and wisdom. In today’s lesson, we are going to discuss Mr. Soros, learn a little about why he is one of the greatest traders ever and most importantly, discover what he can teach us that will improve our own trading.
George Soros is famously known as “The Man Who Broke the Bank of England.” He earned this title in 1992, when he made more than a billion dollars shorting (selling) the pound sterling. He is the co-founder and manager of the Quantum Endowment Fund, an international hedge fund with more than $27 billion in assets under management.
Soros began his life under the toughest of conditions; living as a young Jewish boy in Nazi-occupied Hungary in 1944. He then immigrated to England to attend the London School of Economics and moved to the US in 1956 to work as a stock broker. Today, Soros is a passionate investor, philanthropist, and democratic idealist who could teach us a lot about investing, trading and philosophy.
So, what can we learn from this master trader that we can directly apply to our own trading? Let’s discuss…
Soros’s trading philosophy
George Soros is mainly a short-term speculator. He makes massive, highly-leveraged bets on the direction of the financial markets. His famous hedge fund is known for its global macro strategy, a philosophy centered around making massive, one-way bets on the movements of currency rates, commodity prices, stocks, bonds, derivatives and other assets based on macroeconomic analysis.
Whilst this is slightly different from my own personal trading approach which relies more heavily on technical analysis and more specifically, price action analysis, there are still many parallels between George Soros’s trading philosophy and mine…
What can we learn from George Soros?
It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right, and how much you lose when you’re wrong.
This first quote from Mr. Soros really drives-home a point I made in my article on why winning percentage doesn’t matter. That point basically is that you can make money trading even if you don’t win the majority of your trades. How? Through proper risk reward. It really is as simple as that.
If you don’t know how to set your trades up so that you are making about 2 times your risk or more on your winners, you’re going to have a very, very hard time being profitable over the course of a year. I have discussed in multiple articles how you can make money trading even if you only win 40% of your trades, so, that means you’re losing 60% of the time! If you don’t understand this, then read my article on a case study of random entry and risk reward. But, basically what you need to understand it that as your reward per trade increases, the number of wins you need to be profitable decreases. The key lies in knowing how to pick the right trades and not over-trading, which is easier said than done, especially if you don’t have the right training.
Most of the time we are punished if we go against the trend. Only at inflection points are we rewarded.
This quote gels nicely with my overall technical analysis approach. I am primarily a trend-trader and I use price action to find high-probability entries into trades. But, trends end, and they ebb and flow and it’s at key chart levels or major inflection points that trends can reverse dramatically. So, I also look to trade from these major chart levels either by watching for clean price action signals or by getting in at the level on a blind entry.
The whole thrust of my approach is that the course of events is indeterminate.
In agreement with the teachings of the late-great Mark Douglas, Soros is saying in the above quote that we can never really know for sure what is going to happen in the market. We must trade in-line with this fact, otherwise we will get too emotional about our trades and we will start thinking that we have some special gift for predicting the market.
The truth is, by reading price action and knowing how to trade from it, you can develop an effective trading strategy that can get you very high-probability signals to both enter and exit the market. But, there are so many variables that affect a market’s price each day that there truly is an element of randomness to any given trade, that we cannot control. Thus, we must control what we can: our entry price, our risk, our stop loss and target placement and the money we are using to trade with, as well as our own behavior and thinking. Anything outside of these things is totally out of our hands in the market, and the more you try to control the market the more you will lose.
Being so critical, I am often considered a contrarian. But I am very cautious about going against the herd; I am liable to be trampled on… Most of the time I am a trend follower, but all the time I am aware that I am a member of the herd and I am on the lookout for inflection points.
This is similar to a previous point above, but the key point here is the word contrarian. I have always considered myself a contrarian and I’ve even written an article on the contrarian trading strategy. However, first and foremost, I am a chart-reader, so I always understand what the dominant trend is, as well as the overall story on the chart. As Soros, said, I am liable to get trampled on if I fight a strong trend. So, being contrarian doesn’t always mean trading against the trend, it means you think differently than the herd. I wait for pull backs within the trend, rather than entering when the trend is extended and about to pull back (as most traders do). Being contrarian to me, means I am following the price action and thinking like a professional, always trying to do the opposite of what the amateur is doing.
The market is a mathematical hypothesis. The best solutions to it are the elegant and the simple.
OK, anyone following me for any length of time knows that the above quote is my “jam”. The best solutions to just about anything in life are simple, trading included. I’ve written many articles on simplicity in trading, but if you haven’t read my Keep It Simple Stupid article, check it out first.
Therefore, I love price action so much and why I fell in love with it to begin with; it’s simple, yet effective. Tired of all the confusing trading indicators? Well, guess what? You don’t need them, AND they are hurting you. Don’t ask me how I know this, but let’s just say I’ve been at this for 16 years and the early days were filled with indicators and over-thinking, over-complicating and losing money.
Risk taking is painful. Either you are willing to bear the pain yourself or you try to pass it on to others. Anyone who is in a risk-taking business but cannot face the consequences is no good. There is nothing like danger to focus the mind, and I do need the excitement connected with taking risks to think clearly. It is an essential part of my thinking ability. Risk taking is, to me, an essential ingredient in thinking clearly.
I love this quote. To me, he is saying that if you don’t enjoy taking risks, specifically financial risks, you aren’t going to survive as a trader. Risk helps focus the mind he says, I am the same way; I feel like I am more keen and aware of the market when I have money at risk. But, there is a fine-line between being focused and being over-involved and over-trading. Risk can make you focused, but you don’t want to spend all your time watching the charts, this can lead to trading addiction.
The key point is, you must really love this ‘game’ to thrive at it. Some people just are not mentally cut out to take financial risks and be able to operate effectively in the market with their money on the line. That’s OK, this isn’t for everyone, but me personally? I love it. You probably do too, that’s why you’re reading this ;).
If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.
Trading how you should trade to make money is relatively routine and predicable. Meaning, there shouldn’t be huge ups and downs and changes in your trading routine. You should be going through a predictable plan of action each day as you analyze the charts and there shouldn’t be a huge variance in your trading behavior each day.
If you are over-trading and risking too much (gambling) you are experiencing high-highs and low-lows, emotionally speaking (and financially). This can be fun and even thrilling, but you’re going to end up broke. You don’t want to end up broke so try to make your trading as ‘boring’ as possible. By ‘boring’ it doesn’t have to actually be boring – it just must be non-emotionally-charged. Learn to love the ‘pain’ of routine and that routine will turn into profitable trading habits. Someone much wiser than me once said, “Suffer the pain of discipline or suffer the pain of regret”, let that permeate through your mind for a while.
Short term volatility is greatest at turning points and diminishes as a trend becomes established. By the time all the participants have adjusted, the rules of the game will change again.
What Soros is saying here is that volatility is greatest when investors without conviction cannot hold their position as the trend begins to change. The early adopters of a trend are the most knowledgeable and have the greatest time horizon, so they can hold through the normal ups and downs that occur in the markets. As the trend gets older, the latecomers (newbies), who are simply chasing the past performance (they FEEL good now that the trend seems cemented), have little conviction in the trend and can be easily shaken out when the original investors begin to take profits and move on. In short, the weaker hands in the market get scared at the slightest move against their position and most of these people naturally tend to enter when the trends are very old and concomitantly about to change course.
That high level of volatility is indeed a telltale sign of turning points (both up and down) in the markets. For a price action trader, volatility is our friend and if you know how to read it properly it can be very profitable.
I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.
Finally, just like Soros, I too have survived this long in the market by recognizing my mistakes, admitting I was wrong and fixing the problem. It also means that I recognize when a trade I entered is not right and get out.
Trading is not for the person who cannot admit they are not perfect or when they’re wrong. You are going to be wrong a lot in trading, especially in your early / learning days, so get used to it, embrace it and LEARN FROM IT or pay the price.
George Soros made his initial fortune by taking a contrarian position; he bet that the British Pound would sell-off when it was high and seemed strong and most people were long. Soros was able to do this by being an astute student of the markets and charts. In my article on the false break trading strategy I even include a chart that shows there was an obvious bearish daily fakey sell signal in the GBPUSD the day before it collapsed. I’m willing to bet Soros saw that reversal signal as the ‘final straw’ for him to short. Either way, he was a contrarian at heart and therefore I feel such a strong connection with his approach.
When you learn to read and trade from the natural price action on the charts, you inevitably start thinking more like a contrarian and less like a herd-follower. You stop being afraid because the chart starts making more sense to you. Fear comes from lack of knowledge, from not understanding that which we are afraid of, and you certainly cannot be good at something if you fear it. You can eliminate your trading fear by gaining more knowledge and learning to trade price action. If there is one thing we can say to summarize George Soros’s trading success, it’s that he developed his trading abilities so acutely that he had no-fear of taking any trade, and we can see the pay-off of such an ability in his famous billion-dollar win shorting the British pound