"No pain, no gain" from the world of athletics (keep-fit, body building and other sports) is another phrase that has a similar meaning. You've got to put in a lot to expect as much proportionally. Members of our actuarial science students' association had it as one of their slogans, and it really made a lot of sense to me back then. Forex trading is one of the ventures that involves a great deal of risk, but is the risk worth it?
Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd - CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd - AFS license No. 246566.)
It is very common to see a similar warning on the website and in newsletters by various forex dealers. Clearly, these types of trading are risky. You can lose everything in just a day, but you can gain a lot in about the same period.
The story is told about the biggest forex trade ever made which gained the trader over £1 billion. Yeah! George Soros is a very experienced investor and undoubtedly one of the richest in the world. Just like other successful and wealthy persons who climbed their way into affluence, George only hit his highest "jackpot" when he was 62 years old. Forex trading is not for the get-rich-quick minded youth that is especially found in the African region (I am a Ghanaian, and I testify to this trait being widespread in Ghana). Mr Soros (turned 87 on August 12) had a great deal of expertise and experience when he went short ahead of the renowned Black Wednesday, which is exactly 25 years and 1 month ago today.
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.
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