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While the innate volatility of the forex market can prove daunting for some, the derivative nature of currency enables you to leverage this to your advantage as a trader.
With strategies such as scalping, for example, you can execute a large volume of small trades in the pursuit of incremental profits, with each position held for a matter of minutes. This makes it possible to profit from sudden and potentially volatile price movements, while gaining just a few pips at a time.
In the fx market, you can also bank significant profits by ‘shorting’ one currency against another and cashing in as the underlying value of the asset falls. We’ve seen some incredible examples of this through history, many of which have been a source of huge controversy.
Andy Krieger Versus the Kiwi
Back in 1987, Andy Krieger was a 32-year old currency trader at Bankers Trust, carefully watching the international currencies that were rallying against the dollar in the wake of the Black Monday crash.
This crash had sent shockwaves through the international stock markets, while also sending investors fleeing from the USD and in search of less damaged currency assets.
This saw currencies such as New Zealand dollar experience huge demand in a short period of time, causing the Kiwi to become considerably overvalued. To capitalise on this, Krieger assumed a short position against the NZ dollar, with this worth hundreds of millions of dollars and said to exceed the entire monetary supply of New Zealand.
The subsequent selling pressure combined with the lack of currency in circulation forced the price of the Kiwi down by as much as 5% shortly afterwards, enabling Krieger to bank millions for his employers.
Stanley Druckenmiller Bets on the Mark (Not Once, but Twice)
Interestingly, trader Stanley Druckenmiller made millions through two different long bets on the same currency, all while working for George Soros’ Quantum Fund (we’ll have a little more on Soros later in the piece).
Druckenmiller’s first trade followed the fall of the Berlin Wall, as concerns over the reunification of Germany’s East and West combined to depress the German mark to an extremely low level. Under Soros’ instructions, he purchased two billion German marks in anticipation of a future rally, with this long position ultimately worth millions of dollars as the currency soared.
Incredibly, Druckenmiller once again went long on the mark in the wake of ‘Black Wednesday’, expecting the mark to make huge gains against the British pound. He also snapped up German bonds, creating a comprehensive trade that delivered huge profits within a very brief period of time.
George Soros vs. The British Pound
Black Wednesday was the culmination of a longstanding battle between the British pound and the German mark, ahead of the former’s removal from the so-called “Exchange Rate Mechanism” (ERM) in September 1992.
Prior to this, the GBP had been closely shadowing the mark, with the UK keen on keeping the value of the ailing pound above 2.7 marks. However, the measures used to achieve this left Britain with spiralling interest rates of more than 10% and equally high inflation, with seasoned currency investor George Soros one of the first to recognise these challenges.
In fact, Soros bet on these market forces combining to extract the pound from the ERM, shorting the GBP just before it began to plummet against the mark.
While the move caused huge controversy and caused Soros to become known as ‘the man who broke the Bank of England’ the savvy investor pocketed at least $1 billion from the trade and confirmed his status as the world’s prominent currency dealer.
If you want to learn more about Forex Trading, you can find more information through the Admirals Guide Forex Trading for Beginners.
