The Great British pound or pound sterling, as it is more commonly known, is considered to be among the oldest currencies in the world, tracing its history back as far as the 8th century. It is the fourth most traded currency in the forex market and third most widely held reserve currency across most global foreign exchange reserves. Due to its higher value, as compared to other currencies, the GBP is also considered a key currency benchmark and is a very liquid element of the forex markets.
Of course, the currency has been very volatile over the past couple of years, following the Brexit vote, and is expected to continue to fluctuate until the time the Brexit negotiations are completed. So, if you are interested in trading the GBP, keep a close eye on the progress being made in the negotiations and any announcement associated with Brexit. Those who have closely followed the pound and traded it at the right time have made quite a name for themselves, globally. Here’s a look at two of the most successful GBP traders, who are also considered to be among the top 10 most successful forex traders of all times.
George Soros: The Man Who Broke the Bank of England
Soros is a living legend. He made his reputation with one single trading decision on September 16, 1992 – a day also known as Black Wednesday, or the day when Soros shorted the GBP, profiting from over $1 billion in the process.
This happened at a time when the UK was a part of the Exchange Rate Mechanism (ERM), which required government intervention if the pound sterling ever weakened below the Deutsche Mark. George Soros brilliantly predicted that a combination of various circumstances, such as the existing high-interest rates in Britain and the unfavorable terms in which the nation had joined the ERM, had put the Bank of England in a vulnerable position.
The government was committed to intervene when the UK currency weakened, by either raising interest rates or buying GBP, or both. The ongoing recession at that time meant that raising the interest rates would hurt the economy. So, the government would be left with only one choice – to buy the pound sterling to raise its price.
In the weeks that led up to Black Wednesday, Soros built a large position shorting the GBP. On the eve of Black Wednesday, the President of the German Bundesbank commented regarding certain currencies potentially coming under pressure. This led Soros to significantly increase his position.
The next morning, Wednesday, the Bank of England started buying back the pound sterling by the millions. However, even after having bought billions of GBP, the Bank of England found little change in the value of the currency because other traders, following Soros’ lead were selling the pound.
Finally, after even a rate hike failed to bring about the desired increase in value for the GBP, the UK exited the ERM and resumed a free-floating pound sterling. The result of all of this was that Soros and his Quantum Fund were richer by a few billion dollars.
Nick Leeson: The Man Who Ruined Barings Bank
Nick Leeson is a former derivatives broker, who became well-known following his time at Barings Bank, the oldest merchant bank in the UK. He was a rogue trader who made unauthorized, speculative moves, earning huge profits for Barings Bank. He managed to bring in £10 million for the bank, contributing 10% of the institution’s annual profits in 1992. This earned Leeson a bonus of a whopping £150,000 on his salary of £50,000.
Unfortunately, his luck started running out soon after. This led him to use Barings Bank’s error accounts to hide his losses, which turned out to spell his doom. Over a period of three months, he made several vain attempts to make up for his losses but ended up losing Barings Bank a total of $1.3 billion. In 1995, he was tried and charged with fraud.
What Can We Learn From Famous Traders?
When it comes to trading, there is a lot to consider – so what can we learn from famous traders? Well, while Soros held huge short positions during his time, he always ensured that his downside was restricted and this is what helped him gain respect within the forex world.
He was very perceptive and considered all angles of the market. Soros once famously told the Wall Street Journal, “I’m only rich because I know when I’m wrong.”
Soros did not follow traditional economic theories to make trading decisions. Instead, he believed in “reflexivity,” a theory that states that a feedback loop exists between events and perception. So, the perception of participants in the forex market tends to shape price movements, which in turn strengthen the perception.
With regards to Leeson’s trading strategies, we can see that trying to cover his losses was actually a fundamental mistake. When something goes wrong and a trader suffers a loss, most experts suggest taking a pause, evaluating what happened (and why) and then modifying trading strategies accordingly. Simply continuing without reviewing your decisions can have a negative effect on your capital.
Initial successes can make traders overconfident. However, Soros understood and so should we that adequate risk management is the only way to limit losses.