Bill Lipschutz was the biggest currency trader in the world during the 1980s and in his eight-year career with Salomon Brothers, he generated more than half a billion dollars in profits trading currencies.

Lipschutz helped create the Salomon Brothers FX department which was the most important player in the market when he was there. With an ability to manage risk and call FX markets correctly, he once had 16 positive months in a row. At this time, he turned over half of the currency-option volume on the Philadelphia Stock Exchange and was on many occasions, responsible for up to 80% of the open interest on the market.

Trading Strategy

Bill Lipschutz has had his fair share of losses and like the all the great traders, he's learned from them. One of them involved his personal account, in which he lost $250,000, which he had taken five years to build, in a matter of days, the effect was to tighten up risk control.

Risk Control

Also, he began to adopt better risk control strategies. Which would include not placing the entire trading capital into one single trade, or even into trades which are highly correlated. Also, analyze the risk / reward ratio at the current point in time and NOT at the point when the trade was first taken. All the great traders know how to manage risk and many of the greatest traders have been taught by the pain of taking a big loss. If you want to win at Forex trading, strong money management is the foundation any successful strategy is based on.

The Importance of the Fundamentals

“I don’t trade on dreams or rumors. I’m a fundamental trader. I try to assemble facts and decide what kind of scenario I think will unfold.” Bill Lipschutz, Market Wizards

Its the fundamentals which drive the big trends and Bill had the discipline to follow his basic strategy of placing trades only when the fundamentals are favorable and he will study all the facts to determine a justification for a trade before placing it in the market. This may sound simple but most traders don't have the ability to study the facts and work out there impact on prices.

The Importance of Trend Following

Big trends last a long time and you can see big trends in any currency pair which last for many weeks, months or even years and Lipshutz commented:

"It is well acknowledged that the most profitable market environment for FX [foreign exchange] trading is a trend – in particular a trend that unfolds over a medium-to long-term time horizon,"

Lipschutz identifies big trends and then tries to ride them to their conclusion but of course all traders want to do this but there is a major problem which all currency traders face when trend following and that's deciding exactly when a trend may end and also, staying with it during counter reactions – is the counter reaction a trend change or just a reaction within the trend? If you want to win at FX trading you need to know.

Holding Positive Carry

Another simple idea he uses is the carry trade...

"A key to profiting from a trend is the ability to stay in the trade and not be shaken out during periods of price consolidation or correction,” So what's Lipschutz's solution to this problem we all face?

His solution is to "hold positive carry" so what is it and why does it make trend following easier?

When you make any currency trade, you obviously exchange one currency relative to another and it's more than likely, the two currencies will have different interest rates.

To "hold positive carry," all you have to remember is to exchange a currency with a low interest rate for a currency with a high interest rate and benefit from the interest rate differential.

Life After Salomon Brothers

Lipschutz left Salomon Brothers in 1990 at the age of just 36 but soon He eventually formed Hathersage Capital Management which during the the 1998 Asian financial crisis, when panic took hold of the yen market, Lipschutz cleaned up and was up 42 percent for the year year. Over the past 15 years, Hathersage has made an 18.8 percent average annual return and only one in one month period did losses exceed 5%.

Books

YOU Can read a must read interview will him in the classic New Market Wizards: Conversations with America’s Top Traders, by Jack D. Schwager, 1992.

Final Words

This quote probably sums up why Lipschutz is one of the greatest traders the FX world has ever seen.

"It's the intricacies of the game itself that drive me," he says.

"It's about getting up every day and trying to figure out how to beat the market. That's an ongoing fascination that, in its purest form, never changes.”

Bill Lipschutz not only is a great trader, he was driven to be one of the best traders and it's obvious he loves the challenge of what he does. His status in the industry was reflected by his induction into the Traders Hall of Fame and he is acknowledged as one of the best FX traders of all time.