How to Trade Forex like George Soros

Back in September 1992, George Soros pulled off a coup that still is legendary in forex circles today. He took a close look at the fundamentals underpinning the British pound, and reached the conclusion that the Bank of England could not support its currency if it was aggressively shorted. He put his money where his mouth was, and ended up making $1 billion by breaking the Bank of England.

Forex in the spotlight

When George Soros took down the Bank of England, forex was an exotic investment that few investors – particularly small ones – had access to. More than two decades on, and the world has changed. The size of the forex market dwarfs other financial markets, and you can start to trade online in as little as minutes.

However, much of the volume in retail forex trading comes from technical analysis – traders looking for patterns in charts that indicate potential upcoming currency moves. Often, trading takes place at a fast pace, with investors entering and exiting positions in days – or even hours. Many of these investors pay little or no attention to macroeconomic drivers, instead relying on mathematical signals to execute their trades.

Fundamental analysis

What Soros did was different. He looked at fundamental drivers and conditions in the market to identify the vulnerability of the British pound. While few of us have the resources to do what Soros did, fundamental analysis can nonetheless be an extremely powerful investment tool in the forex market.

Time and again, currencies have responded to these fundamentals. For example, the euro has suffered due to the ongoing economic crisis in the euro zone. The Canadian dollar has seen a precipitous decline against the US dollar recently, due in large part to concerns over declining oil prices. Strong economic performance, combined with expectations of rising interest rates, have propelled the US dollar higher against most other major currencies.

Using ETFs to invest in forex

It is perfectly possible to invest directly in the forex market, buying and selling currencies through a Forex broker. This works perfectly well whether you are using fundamental analysis or technical analysis. However, if you are looking to invest and don’t feel you have the skills and contacts of George Soros, then an exchange traded fund (ETF) can be a good option.

ETF’s behave just like stocks – you can buy and sell them in the same way. However, they are actually shares in investment funds that you are buying and selling.

Some ETFs specialize in well-defined fundamental strategies within the forex market, giving you the opportunity to trade on fundamentals without having to understand all the nuances of economic analysis. For instance, there are funds that invest in currencies with high interest rates, and short currencies with low interest rates – this is known as a carry trade and is a strategy that Soros has utilised over the years.

On the other hand, you may also consider buying ETFs that simply track the performance of a currency. For example, there are ETFs that track the dollar index – which is a weighted index of the value of the US dollar compared to a number of other major currencies.

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. The information provided can under no circumstances be considered as a recommendation to engage in any trade. 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 Forex Pty Ltd -AFS license No. 246566).