5. George Soros vs. The Thai Baht (1997) 
In the years running up to 1997 there were a number of signs that it would be trouble with a number of Asian economies. A number of economists including Paul Krugman attacked the supposed ‘Asian economic miracle’ publishing papers as early by 1994. From 1985 to 1996 the Thai economy had grown an average of 9% every year while keeping inflation in check, however by 1996 times were changing. Many felt the Thai Baht which was pegged against a basket of currencies with the main component being the US Dollar was vastly overvalued. Soros who in 1996 sent members of his hedge fund out to Thailand to undertake research agreed. On the 14th and 15th of May 1997 their Thai Baht was hit by a number of speculative attacks including ones undertaken by Soro’s Quantum Fund. On June 30 1997, Prime Minister Chavalit Yongchaiyudh made a public announcement stating that his government wouldn’t devalue the Thai Baht. Many of the speculators including Soros held that the Thai government were ill-equipped to defend the overvalued Thai Baht triggering a huge sell off of the currency. By the 2nd of July 1997 the Thai government were forced to let the Thai Baht float freely, with the Thai Baht swiftly losing almost half its value. 

4. Andy Krieger Vs. The Kiwi 
The year is 1987 and Andy Krieger is a 32 year old currency trader at Bankers Trust who was about to make one of the greatest currency trades of all time. Krieger was actively monitoring the currencies which had rallied against the dollar following the Black Monday Crash. As investors and multi-national corporations rushed to pull their currency reserves out of the US and into other currencies that had suffered so badly in the market crash, Kreiger came to the realization that some of the rallying currencies would become fundamentally overvalued creating the perfection arbitrage opportunity. The currency which Krieger decided to target was the New Zealand Dollar also known as The Kiwi. Using new techniques developed in part due to the rise of options Andy Krieger took on a massive short position in the currency worth several hundred million dollars. It has been said that the position was in fact larger than New Zealand’s total money supply, this selling pressure and the overall lack of currency in circulation led to a sharp drop in the value of The Kiwi. Which made Bankers Trust then Krieger’s employer millions of dollars, later on Krieger left Bankers Trust to go work for the infamous George Soros. 

3. Stanley Druckenmiller Shorts the Deutsche Mark 
In 1989 the Berlin Wall fell as the Eastern bloc and the Soviet Union began to crumble eventually leading to a Europe free of Soviet oppression. While others were celebrating these events and talking about The End of History some speculators were out to make a fast buck. The fall of the Berlin Wall also signal the reunification of Germany and this had led to a depression in the value of the German Deutsche Mark. This was perfect understandable with East Germany having an economic output of half of the more developed West. However Stanley Druckenmiller took a long position on a possible future rise in the price of the currency. Soros then told to Druckenmiller to increase the bet, buying a total of 2 billion German Marks. The bet payed off and helped the Quantum Fund have a bumper year posting huge returns. 

2. Soros against the British Pound 
The EU treaties of the early 90’s forced members of the European Union into the Exchange Rate Mechanism in order to align the various economies together in order to prepare Europe for the introduction of the Euro. Members of the Exchange Rate Mechanism had to keep their respective currencies above a certain price level against the German Deutsche Mark. Britain’s membership of the ERM was on the condition that the British government kept the value of the British pound above 2.7 Marks. Britain’s attempts to achieve such a feat led to high levels of interest rate and equally high rates of inflation. Many Speculators including Soros thought such an arrangement would hold out in the long run and they were right. This led to many aggressive speculators taking up large short positions in the pound with Soros borrowing heavily in order to take up a huge position in the British Pound. This all came to a head on the 16th of September 1992 when the British Government attempt to prop up the pound Sterling against the currency speculators, raising interest rates to 12% (with further promises to raise the rate to 15%) while also buying billions worth of Pounds. However by 7pm that evening the Government were forced to withdraw from the Exchange rate mechanism meaning that Soros pocketed an estimated $1 billion dollars. 

Quants are the math geniuses who have helped Wall Street create algorithms and mathematical models which drive much of the trade and activity on The Street. Some have blamed the Quants for 2008 financial crisis and the 2010 flash crash. This documentary takes a look at the increased role these geniuses play in creating the models that Wall Street and the financial sector increasingly lean on. This documentary gives the viewer a good insight into the huge role algorithmic trading and complicated models now play in the financial services sector. 

For those who don’t already know a Market Maker is a CFD brokership model where the brokerage takes the positions of those trading with them onto there own books, not necessarily placing a trade in the physical market for that particular instrument. It is often asked how a brokerage can make money from such a business model especially if they have a number of successful customers on their books. However a Market Maker has a number of different ways in which they can alleviate and control their internal risk. 

Firstly, a lot of the time a broker can offset different client positions against one another meaning that they profit the spread as commission. 

Suppose that there are two different clients who both simultaneously open positions in the EUR/USD. One Buys a Lot while the other sells a Lot, meaning that until one of the traders closes their position the brokerage is not exposed to any risk. As any profit made by Client #1 will be offset by the same loss in Client #2’s account, this remains true until the 2nd Client closes his position leaving the brokerage exposed to any continuing profits that the first client’s position makes. This may not be a major problem as by now a third client may have opened a position selling the EUR/USD therefore again covering the brokerage from any risk. 

The problem for Market Makers comes when there is a huge number taking on positions in one direction. But again there are still ways in which a Market Maker can deal with such risk, as explained in the following example.  

In the above example you can see that clients have opened 7 Buy Lots, while one other client has opened one Sell Lot. This means that the Market Maker is exposed to 6 Lots of risk, which presents them with a significant risk. Supposing these positions look like there going to be profitable due to some or other breaking news, the broker could either take the losses providing they had the required funds. Alternatively the brokerage could open positions in the underlying physical instrument to mirror that of its clients reducing its risk to zero, while there would be some costs in this by going into the markets with a physical brokerage the broker would get a much a lower spread than the broker offers to it’s clients. This allows them to make some limited profits. This is also the reason that brokerages widen their spreads during high volatility periods, the bigger the spread the more profit that can be potentially made. 

Over the last few years Binary Options have risen to prominence online and are often marketed as the latest and greatest way to trade the financial markets. A Binary Option is a type of option where the buyer receives a fixed payoff or nothing at all. Binary Options are known by a number of different names including all-or-nothing options and digital options. There is some confusion among the public around Binary Options this is due to the fact that there exists both exchange traded binary options and non-exchange traded Binary Options.  

Binary Options have been available over-the-counter (sold directly to the buyer) for a number of years now. However these were general seen as an exotic instrument due to the fact there was no market for trading these over the counter options, between the dates they were issued and expired. These Binary Options were generally embedded in more complicated option contracts and were normally only purchased by extremely sophisticated buyers. An interesting development began in mid 2008 with a number of companies beginning to offer Binary Options online to prospective clients. The binary options offered by these companies were essentially a dumbed down version of exchange traded binary options. By January 2012 it was estimated that 90 of these platforms existed including white label platforms. The proliferation of these sites is unsurprising due to the fact the odds are stacked significantly in the houses favor. The instrument also differs from other financial derivatives (such as CFD’s) in the fact that a binary options provider cannot profit unless his customers on the whole make a loss.  

These kinds of options have rightly been criticized by many including Gordon Pape who wrote a very damming article in Forbes magazine. I myself have personally criticized Binary Options a number of times aiming to show that Binary Options offer a raw deal to those who trade them. In one of my investigations into Binary options using Monte Carlo simulations I showed that in order to be profitable at trading Options which offered a 70% rate of return you would have to predict an instruments movement correctly over 60% of the time. While I’m sure there are a few unique and talented individuals who could do predict the movement of financial instruments with such accuracy, they would still be better off trading other financial derivatives such as Financial Spread bets or Contracts for difference.

Another problem with these dumbed down options is that for much of their existence they have been completely unregulated. Initially a number of financial regulators including Cysec of Cyprus came out to say that Binary Options were not covered under their remit due to the fact that they were not properly financial instruments. It was widely thought that Binary Options as offered by these providers would become regulated as a form of gambling, in fact a number of providers most notably OneTwoTrade went down the route of becoming regulated by gambling authority. However, in 2012 Cysec made the decision to regulate Binary Options as financial instruments becoming the first MiFID regulatory authority to do so. However, I believe that they will later rue this decision, as it will weaken their reputation as prudent financial regulator. I’m not against Binary Options but what I do resent is them being represented as a financial product when they are really a form of fixed odds betting. Though I would go on to say that if you want to make bets on financials their are better alternatives including a number of bookmakers and if you reside in the UK in the form financial spread bets. 

Real money can be made from Binary Options, not the dumbed down pseudo Binary Options offered on these platforms but in real exchange traded Binary Options where there are significant arbitrage opportunities to be had due to Options miss pricing. I suggest that those who are interested in trading the financial markets look into other instruments including Contracts for Difference, Margin Trading and if your jurisdiction allows it financial spread betting.  

Widely promoted by Dr. George Lane in the 1950’s the Stochastic Oscillator is a momentum indicator which uses both support and resistance levels. Stochastic refers to the current price in relation to the price range of the instrument over time. The idea behind the method that one can predict turning points by comparing the close price of the instrument in question to the value of the Stochastic Oscillator. 

The Stochastic Oscillator measures the last close relative to the high and low range over a certain period of time. Interpreting the Stochastic Oscillator is a relatively easy task even if calculating it is not so simple. The Stochastic Indicator measures the last close relative to the high-low range of a certain period of time giving us a numerical number which is often displayed on a graph below the instrument; a reading of above 50 means that the instrument is in the upper half of its set historical range while a reading below 50 means that instrument is trading in the lower half of the historical range the trader has chosen. Readings above 80 show that the instrument is near its high in the given time period while readings below 20 show that the instrument is near to lowest close. 

The Stochastic Oscillator often comes in three different varieties; fast, slow and full. With the Fast version being the closest to Dr. George Lane’s original formula for calculating the stochastic oscillator. When using the three different varieties you will notice some minor differences between the graphical depiction of the indicator with the fast line appearing more choppy than the others. 

Using Stochastic Oscillator as Overbought and Oversold Indicator 
Being a bound indicator, the Stochastic Oscillator can be used easily to identify overbought and oversold levels. The Oscillator ranges from 0 to 100 regardless of any sharp declines or increases in price, making it a simply to use when determining whether an instrument is oversold or overbought. Traditional settings use 80 as the overbought threshold and 20 as the oversold threshold, however these levels can be adjusted to suit the particular instrument you are trading. In regard to the traditional use, readings above 80 for a 15 day Stochastic Oscillator would indicate that the underlying instrument was trading towards the top of its 15 day high. Conversely readings below 20 suggest that the instrument is trading towards its 15 day low point. 

However it is important to note that overbought and oversold are not necessarily bearish or bullish. For example instruments can become overbought and stay overbought during a strong upward trend. If you notice a trend of closes that keep the oscillator towards its upper bounds, it is a good sign of sustained buying pressure. Therefore it’s important to identify the bigger trend and then trade in the direction of the trend. 

Bull & Bear Divergences 
A divergence forms when a new high or low price is not confirmed by the Stochastic Oscillator. Bullish divergences occur when a price drops lower but the Stochastic Oscillator forms a higher low. This is meant to show less downside momentum and is meant to foreshadow a price reversal. Bearish divergences occur when the price records a new high but the Stochastic Oscillator records lower highs, this suggests less upside momentum and is meant to foreshadow a dip in price. In traditional analysis a bullish divergence is confirmed with Stochastic Oscillator break above 50 and bearish divergence is confirmed when the Stochastic Oscillators drops below 50. All this is very difficult to explain and is best illustrated through the use of charts.  

When using the Stochastic Oscillator 50 is a very important level to watch. As 50 is the center line between the two extremes, therefore a crossover is something to look for as it shows that price either trading in the upper half of the range or it is trading in the lower half and can signal movement one way or the other.  

Conclusion 
Oscillators are best suited for determining trading ranges, though they can also be used with securities that trend. The Stochastic Oscillator is great for determining opportunities in line with the underlying trend. The exact setting to use on a Stochastic Oscillator is really down to what your personal preferences are and what instrument you are trading. A shorter look back indicator will produce a more choppy oscillator with more overbought and oversold readings. As with many technical indicators its important to use it conjunction with other technical indicators to either confirm or deny the trends.