Making a success on the forex market is a marathon rather than a sprint. It is about carefully using your resources and forex funding to stay on target in the long run, rather than rely on potentially lucrative but highly risky single trades.
However, it would be wrong to say that there have been no large trades that due to exceptional circumstances led to gargantuan profits.
Most of these tend to be short positions, betting that a particular currency is overvalued and set to fall, as happened with the New Zealand dollar in 1987, and the Great British Pound in 1992.
However, the man who spotted the potential of such a trade on George Soros’ behalf, Stanley Druckenmiller, was also involved in two blockbuster trades that rightly went long and believed a currency was undervalued due to one of the biggest events in the history of the world.
What Is Short And Long In Forex?
In the world of trading, almost all trades are commonly described as either short or long.
Long trades are the purchase of an asset that is expected to increase in price, either due to
events that increase demand or because it has been undervalued and is set to correct itself.
By comparison, short trades can vary but are typically made by borrowing an asset and selling them immediately, but buying the asset back at a later date, ideally at a much lower price.
The terms are a little more complex in forex because the main asset being purchased is currency pairs, so by definition, you are taking a long position on one half of the pair and a short position on the other.
However, it is still possible to consider forex trades in terms of long and short, but it is more a question of intent; if you go into a trade with the idea that one currency will appreciate in value then it is a long position even with the other half of the pair, and vice versa for short trades.
Looking For Freedom
In 1989, as the Iron Curtain fell and the Soviet Union collapsed, the Berlin Wall fell in part due to misreading a note but buoyed by help all over the world (and David Hasselhoff) and everything that was known had suddenly shifted forever.
Chaotic world events are times when investors with a business plan, a lot of resources and an idea that certain currencies are not priced at the level they should be, start to plan their bigger trades.
This was the case for Stanley Druckenmiller, a financial manager who in 1988 started work at the Quantum Group led by George Soros, a group that has become famous in forex circles for some of the most audacious trades in history.
One of his first trades came in the immediate aftermath of the Berlin Wall crashing down, uniting Germany and its capital Berlin for the first time since 1945 and the fall of the Axis powers.
This was a monumental event, one that is seen in retrospect by historians as the end of the 20th century as we knew it, but uniting the country was a long and exceptionally expensive process, ultimately only officially completing on 3rd October 1990.
During this time, the Deutsche Mark, the national currency of Germany during that time, was plummeting in value due to the increased borrowing necessary to privatise the East German economy and the need to scale up infrastructure and the welfare state.
This caused considerable pressure on the German economy and many traders moved to get their money out of the mark. However, not everyone was scared off.
Mr Druckenmiller believed that the market response had been excessive and an overreaction to a seismic world event, and believed that Germany would quickly rally.
After all, this was the country of the “Wirtschaftswunder” or “economic miracle” that took West Germany from a collection of pieces in near-ruin to the third biggest economy in the world by 1989.
Mr Druckenmiller was certain that a correction was on the horizon, but unlike most times that term is used to refer to a trading market, this correction would cause a currency to return to strength.
The original value of his trade was said to be in the hundreds of millions, but once Quantum’s boss George Soros (a man who would play a huge role later in the story), heard about his plan, he instructed him to go long and purchase 2bn marks.
The German mark indeed rallied strongly, netting Mr Druckenmiller and Quantum a multi-million-pound profit.
However, that is not the end of the story of Stanley Druckenmiller and the German mark.
In 1993, Quantum was in the process of orchestrating a very different kind of blockbuster forex trade against a country in a very difficult and more difficult economic position.
So much has been said about the events of Black Saturday and how it cemented George Soros’ reputation as the man who managed to break the mighty Bank of England during an exceptionally rough economic period for the UK.
The entire position, from its long-term effects on the British economy, the methods and motives behind such an aggressive move on one of the world’s largest economies and whether it was ultimately a net positive or net negative have been debated for decades.
However, what is often talked about less often is that whilst the short position was against the pound, a lot of the long position was, once again, in the German mark.
Mr Druckenmiller was the first in Quantum to spot the pound’s weak position in the Exchange Rate Mechanism, having struggled to recover from the stock market crash and its aftershocks at the end of the 1980s.
Much like with his bet on the mark, Mr Soros suggested a gigantic position, believed to be over $10bn when the dust settled, which made the firm $1bn in profit.
The other side of the pair, however, was based on the belief that the fallout of any moves by the United Kingdom to lower lending rates, slash inflation and boost the economy would benefit the economies that traded with the UK the most, such as the French franc and the German mark.
This also came to pass, and the overall trade was one of the single largest in the history of forex, cementing Mr Druckenmiller’s reputation as one of the greatest traders of all time.
However, the story was not quite as positive for the German economy itself, at least during the 1990s. The investment into reunification with East Germany cost over 2tn marks and whilst there was a brief period where the economy enjoyed another miracle, it did not last.
One amazing aspect of Stanley Druckenmiller as an investor was that he had one of the best trading records in history.
During his 30-year career, he never had a whole-year loss, and only had five losing quarters in total. Both of these figures are surreal and practically impossible for anyone else.
It is especially impressive because, much like George Soros, he took a top-down approach to forex investing, focusing on the wider details and bigger picture rather than using precise technical instruments to eke out small but more consistent gains.
He was described by fund manager Scott Bessent as featuring the trading ability of Mr Soros, the analytical acumen of investor and analyst Jim Rogers, and the gut instinct of a “riverboat gambler”.
Ultimately, he did find his limit in 2000, as several calamitous trades in technology stocks in the midst of the dot-com bubble hurt his standing and the general low-inflation nature of the market meant that his talent for spotting pricing inefficiencies was not bearing fruit.
He continued to trade for another decade under his own flag of Duquesne Capital Management, posting annual returns of 30 per cent, but the effects of the 2008 financial crash and the pressure of managing a huge investment fund during an increasingly unsettled financial period took its toll.
On 18th August 2010, Mr Druckenmiller closed his firm and returned the money to his clients, noting that his expectations of making huge profits and big moves with huge sums of money came at a huge emotional cost, compounded by struggling to live up to his bulletproof image.
He still invests on a much smaller scale, holding large positions in stocks such as Alibaba and Microsoft, whilst largely staying out of forex.
What Can Be Learned?
Other than the fact that lightning can strike twice, the long position on the mark is a unique situation that will likely never happen again, not least because the German mark no longer exists, having been supplanted by the Euro in 1999.
The main lessons to learn are not only to look for peaks but also valleys in currencies, as well as understand that whilst long positions are typically seen as a “safer” option, they can also be incredibly lucrative if you do your research.
It also highlights the importance of incorporating a macroeconomic approach into your forex trading strategy. Keeping abreast of world events can sometimes expose new potential trading options.