Whether you are new to trading Forex or an old hand at the currency markets, you are likely to share one key aspiration:
How do I become more successful at trading?
One way to improve is to learn by example and to look at some of the most successful Forex traders in the world. In this article, you'll learn about what the top Forex traders in the world have in common and how those strengths helped them to make huge profits.
While you may have heard statistics thrown around suggesting that the ratio of successful Forex traders to unsuccessful ones is small. There are at least a couple of reasons to be sceptical about such claims.
Firstly, hard data is hard to come by on the subject because of the decentralised, over-the-counter nature of the Forex market. But there is plenty of education material and working Forex trading strategies available to better equip your trading performance.
Second, we would expect the distribution of winners and losers to follow something of a bell-curve, meaning that there would be:
The data that is available from Forex and CFD firms (albeit just a very small slice of the vast global FX market) suggests that the rarest people are very successful traders. Most people stop once they start losing beyond a certain threshold, whereas the big winners keep on trading.
The number of small losers slightly outweighs the number of small winners, mainly because of the effect of market spread. So the percentage of successful Forex traders is not substantially smaller than unsuccessful ones. There is little doubt, though, that the most successful traders are an elite few.
However, by looking at a select group of famous Forex traders we can see that they have a few things in common.
The upshot of these characteristics has been consistent and large profits.
Let's begin our review of Forex successful traders by looking at one of the industry's legendary beacons of good fortune, George Soros.
Mr Soros is known as one of the greatest investors in history. He sealed his reputation as a legendary money manager by reportedly profiting more than £1 billion from his short position in pound sterling. He did so ahead of Black Wednesday, 16 September 1992.
At the time, Britain was a part of the Exchange Rate Mechanism (ERM). This mechanism required the government to intervene if the pound weakened beyond a certain level against the Deutsche Mark.
Soros successfully predicted that a combination of circumstances—including the then high level of British interest rates and the unfavourable rate at which Britain had joined the ERM—had left the Bank of England vulnerable.
Britain's commitment to maintaining the pound's value against the Deutsche Mark meant intervening when the pound weakened by either buying sterling or raising interest rates or both. The recession meant that higher interest rates were very painful for the rest of the economy. This hindered investment when encouragement was needed instead.
Economists at the Bank of England recognised that the appropriate level of interest rates were far lower than those required to prop up the pound as part of the ERM. But the value of sterling was maintained because of the UK's public commitment to buying sterling.
In the weeks leading up to Black Wednesday, Soros used his Quantum Fund to build a large position short of sterling. But on the eve of Black Wednesday, comments came from the President of the German Bundesbank. These comments suggested certain currencies could come under pressure.
And this led Soros to increase his position considerably.
When the Bank of England began buying billions of pounds on the Wednesday morning, it found the price of the pound was little moved. This was due to the flood of selling in the market from other speculators following Soros' lead.
A last ditch attempt to hike UK rates that had briefly hit 15%, proved futile. When the UK announced its exit from the ERM and a resumption of a free-floating pound, the currency plunged 15% against the Deutsche Mark and 25% against the US dollar.
As a result, the Quantum Fund made billions of dollars and Soros became known as the man who broke the Bank of England.
Although Soros' short position in the pound was huge, his downside was always relatively restricted. Leading up to his trade, the market had shown no appetite for sterling strength. This was demonstrated by the repeated need for the British government to intervene in propping up the pound.
Even if his trade had gone wrong and Britain had managed to stay in the ERM, the state of inertia would have more likely prevailed than a large appreciation in the pound.
Here we see Soros' strong appreciation of risk/reward - one of the facets that helped carve his reputation as the best Forex trader in the world. Rather than subscribing to the traditional economic theory that prices will eventually move to a theoretical equilibrium, Soros deems the theory of reflexivity to be more helpful in judging the financial markets.
This theory suggests there is a feedback mechanism between perception and events. In other words, the perceptions of market participants help to shape market prices which in turn reinforce perceptions.
This was played out in his famous sterling short, where the devaluation of the pound only occurred when enough speculators believed the Bank of England could no longer defend its currency.
He once told the Wall Street Journal "I'm only rich because I know when I'm wrong". The quote demonstrates both his willingness to cut a trade that is not working and the discipline shared by the most successful Forex traders.
So George Soros is number 1 on our list as probably the best known of the world's most successful Forex traders and certainly one of the globe's highest earners from a short term trade.
But who else is up there?
George Soros casts a long shadow and it shouldn't come as too much of a surprise that the most successful Forex trader has ties to another of the names on our list.
Stanley Druckenmiller considers George Soros his mentor. In fact, Mr. Druckenmiller worked alongside him at the Quantum Fund for more than a decade. But Druckenmiller then established a formidable reputation in his own right, successfully managing billions of dollars for his own fund, Duquesne Capital.
As well as being part of Soros' famous Black Wednesday trade, Mr Druckenmiller boasted an incredible record of successive years of double-digit gains with Duquesne before retiring. Druckenmiller's net worth is valued at more than $2 billion.
Druckenmiller says that his trading philosophy for building long-term returns revolves around preserving capital and then aggressively pursuing profits when trades are going well. This approach downplays the importance of being right or wrong.
Instead, it emphasises the value of maximising the opportunity when you are right and minimising the damage when you are wrong. As Druckenmiller said when interviewed for the celebrated book The New Market Wizards, "there are a lot of shoes on the shelf; wear only the ones that fit."
Oddly enough, Bill Lipschutz made profits numbering in the hundreds of millions of dollars at the FX department of Salomon Brothers in the 1980s - despite no previous experience of the currency markets.
Often called the Sultan of Currencies, Mr Lipschutz describes FX as a very psychological market. And like our other successful Forex traders, the Sultan believes market perceptions help determine price action as much as pure fundamentals.
Lipschutz also agrees with Stanley Druckenmiller's view that how to be a successful trader in Forex, is not dependant on being right more often that you are wrong. Instead, he stresses that you need to work out how to make money when being right only 20 to 30 per cent of the time.
Here's some of Lipschutz's other key tenets.
Lipschutz also stresses the need to manage risk, saying that your trading size should be chosen to avoid being forced out of your position if your timing is inexact.
We've looked at the biggest Forex successful traders, but there is an army of profitable traders out there. Joining the list of people who are able to consistently turn a profit each month trading FX, is an achievable goal.
So, what's the bottom line?
Well, even the most successful trader had to begin somewhere and if you can regularly generate profits - you can consider yourself a successful Forex trader.
Hopefully this article has given you some insights into traits shared by the most successful Forex traders. Now maybe you should try to top the Forex trader's list yourself, by participating in our ForexBall demo contest.