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Firstly I’d like to wish all of our Trading Tutors Newsletter Readers a very Happy New Year, with an abundance of good times, good memories and good trades for 2010!
Over the Christmas break I was reading a biography of George Soros, a famous investor. I read with interest about his famous 1992 short trade on the British Pound, where he made over one billion dollars – yes one billion dollars – in one day.
It always amazes me when people read stories of traders or investors who make great fortunes and then do no further follow up work to learn HOW they did it. How are you supposed to follow in the footsteps of successful people if you won’t make any effort to study their actions?
When I saw the date of the famous Soros trade on the British Pound – 15 September, 1992, I put down the book, went into ProfitSource and opened a chart of the British Pound (BP-Spotv). What I saw didn’t surprise me – I quickly found plenty of reasons why you would want to be trading short in mid September, 1992.
If you want to make 2010 a good year for you, I’d encourage you to take a 15 minute break from this article, open BP-Spotv in your ProfitSource, and see what you can see. Imagine today is September 14, 1992 – can you see what the chart is telling you? Can you see any reasons to be going short in this market? If this setup occurred today, would you be ready for it?
If you are still reading this article and haven’t gone away to look at the chart, don’t worry – you’re in the 98% majority. Unfortunately, it’s the other 2% that seem to make all the money...
Chart 1 below shows the British Pound (BP-Spotv in ProfitSource) market action leading into the 1992 top and subsequent crash. I have circled the crash period during which Soros took over one billion dollars in a single day.
Chart 1
click to enlarge
The first thing that should stand out to you is the fact that the market made a Double Top around the 2.00 level – a nice round number. David Bowden teaches you about Double Tops in the Smarter Starter Pack, so all Safety in the Market students should recognise this setup.
Next, notice the major price ranges leading into the second top. Do they look similar in length to you? In Chart 2 below I use the ABC Pressure Points tool to measure these ranges.
Chart 2
click to enlarge
Note the equal Price Ranges leading into the Double Top? This is straight out of Section 11 of David Bowden’s Number One Trading Plan manual.
Chart 3 is also from this same chapter. David says “It is from yearly or seasonal ranges that you get the ability to call the big moves. There is no other way.”
Chart 3
click to enlarge
Can you see that the Double Tops were actually on the 100% milestone of the third repeating range? Three equal sections of the market over eight years based on the first major range out on the monthly chart.
A random walk? I don’t think so.
Chart 4 shows a close up of the market action on September 14, 1992. With the big picture work in place, Double Tops and an Island Reversal pattern, would you still want to be long this market?
Chart 4
click to enlarge
I have covered the basic Price work regarding this setup, however I would encourage all Safety in the Market Platinum students to start layering in their second and third dimension analysis to this setup to see what other factors were in play.
I would also encourage students in my Advanced Trader Coaching class to do some work here and continue this discussion online, in our Private Forum.
Now Soros took a ten billion dollar position in this trade, which is more capital than most traders have access to. To put that in perspective, that means for each tick (0.0001 movement) his trade profit or loss would move by around one million dollars.
Have a go at forecasting this market for yourself. Work out where you would enter, how you would manage the trade, and how much capital you would dedicate to this trade.
As David says, your hindsight will become your foresight – IF used often enough.
Be Prepared!
Mathew Barnes
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