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Is George Soros’ Controversial “Trend Reversal” Tactic What’s Missing From Your Investment Strategy?

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A childhood under Nazi occupation may seem unreal to anyone who did not live through it, but the experience was frighteningly real to George Soros. The Nazi army rolled into Hungary when he was only 13, putting an end to school attendance by Jewish children and forcing his family into hiding. He soon learned about Nazi harsh realities as the deportations from Budapest started sending Jews to Auschwitz. Taking an identity as the godson of a government employee, he helped his father generously prepare fake documents for others desperately seeking to escape. After the war, he went to the London School of Economics where he earned his Ph.D.

Understanding Loss

From the perspective that his background provides, George Soros can take a long view of the imperfect understanding that is the human condition. “There is no shame in being wrong,” he said, “but only in failing to correct mistakes.” He applies that philosophy to money management as the “long-term key to profits.” Particularly valuable is his advice to traders not to take losses personally or to equate them with an inability to succeed in the market. The alternative is to manage losing trades while making sure to preserve the equity. Soros has had some huge losers, and he advises traders to expect some losses because that is the nature of the market. The key is not to let them “run out of control.” As long as the winners are bigger than the losers, traders can make money over the long term.

Considering Investment as a Business

A desire to feel an adrenaline rush from trading is the opposite of Soros’ recommendation. It can lead to making too many trades and to getting emotionally involved as they lose. He contends that “good investing is boring” because it requires waiting for the best trading opportunities and the patience to hold them without emotion.

While he acknowledges that “there is no fun” in conducting trades this way, he advises that the fun comes at the end of a transaction that puts “profit in the bank.” To reinforce his view of making money from using a Forex strategy, Soros recommends working smarter instead of harder by trading only the best set ups. Going to work only when a reason justifies it does it make sense to do so.

Taking the Road Less Traveled

George Soros is a master at going against the trends that others may choose to follow. In his approach to trading, he seems to share a preference that Robert Frost expressed in his poem The Road Not Taken. When his Quantum fund bet against England’s pound, Soros ignored prevailing views. His decision to risk $10 billion by speculating on a single currency and shorting the pound earned him the title of “the man who broke the Bank of England”. His move turned out well for him, generating a $1 billion profit in a single day, and some reports indicate that it was closer to $2 billion.

By acknowledging that markets are “constantly in a state of uncertainty,” he asserts that traders can profit by “betting on the unexpected.” Trading against the crowd helps traders ignore the news that can distort decision making. While profit is possible when they follow trends, the bigger outcomes result from correctly reading signals of unexpected events as Soros did.

Continuing to Watch for Distortions

From his long history in the market, Soros has developed theories that work, and his theory of reflexivity addresses the impact of cause and effect. He contends that prices of stocks reflect the public’s perceptions of their value as opposed to any objective basis. Similarly, he notes that traders may make investment decisions on biased perceptions. His assessment of financial markets reveals his opinion that they “never reflect the underlying reality accurately.” Instead, the “distortions find expression in market prices.”

Soros does not accept the concept that technical analysis reflects all of the fundamentals in the price of a stock. Alternatively, he believes that traders’ biases are the reason for the distortion. He further rejects the idea that it is possible to use technical analysis to predict the future by knowing the past. By accepting his opinion that “financial markets generally are unpredictable,” traders can follow his advice to prepare different scenarios. To emphasize the importance of avoiding dependence on mathematical models or predictions, he reminds traders that stock market bubbles are not likely “to grow out of thin air.” While he affirms that they have a basis in reality, they may appear as “distorted by a misconception.”

Keeping Investment Simple

In Forex trading or other types of markets, finding a way to ensure success every time is an impossibility. Investing in the market is both an art and a science that allows traders to make a decision and test it for reliability. Scientists and philosophers use a hypothesis to test a theory. If it does not work, then a satisfactory result of the experiment is that the data does not support it. The important distinction between hypothetical and real experiments is that “an investment decision is intended to make money” instead of “establishing a universally valid generalization.”

Simplicity is the best approach to trading, according to Soros. He laments that “the more complicated the system, the greater the room for error,” as he succinctly puts it. He encourages traders to develop a simple set of rules for trading and trust that they provide an edge over the market. By sticking to it and applying it with discipline, traders can enjoy success.

Going for Results

With an emphasis on practicality, the Soros approach to trading is “to catch new trends early” and to follow up later by finding “trend reversals.” While the practice may help stabilize rather than destabilize markets, he does not do it “as a public service.” As his preferred style of making money, he succeeds by capitalizing on the mistakes that traders make by following boom and bust cycles. By frequently buying what they wish they had chosen and selling what they may soon need, they defeat their own goals.

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