Bruce Kovner is a hugely successful trader who has been active in the markets since the late 70s. On his first trade he made $25,000 using $3000 he borrowed against his MasterCard. Initially after he placed the trade, his profits rose to $40,000 before declining down to $25,000 at which point he decided to take profits and close his trade.
After much success trading independently Kovner decided to start his own trading firm ( Caxton Associates ) and within a few years it had become one of the biggest hedge funds on the planet managing over 15 billion in client assets. ( this was in the 80s so I presume it would be a lot more when adjusted for today’s inflation )
Bruce’s long track record of success ( his firm is almost 33 years old and still running today ) means we can learn a lot from the things he has said about trading over the years. I’ve taken what I consider to be 6 of his most important quotes and gave a little definition as to what the main points are he is trying to get across to traders in the quote.
Risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half.
How much you risk on your trades and how you manage your money when trading is, in Bruce’s eyes, the most important concept to have a deep understanding of when trading.
He also says you should undertrade as much as possible, I’m not sure how many trades Kovner actually takes but judging by the fact he repeats this several times, I’m guessing its far fewer than what me or you would consider to be small.
I think the vast majority of retail traders take quite a large number of trades. It differs depending on which time-frame you trade-off and what type of trader you are but I think for the most part all traders will take more trades than they actually need to. I guess a lot of the reason why this occurs is because traders don’t know which setups are their high probability trades.
Because they don’t know a high probability trade from a low probability trade it means they have to take all the trades which come up as part of their system. Needless to say depending on the trading method being used this can be a significantly large amount of trades.
The last thing Bruce says is whatever size trade you plan on placing should be cut in half before being placed.
This ties in with another of Bruce’s quotes which we’ll look at in later on in the article in which he says one of the biggest mistakes he see’s novice traders make is taking trades which they risk large portion of their account on. Novice traders typically tend to take big risks when they start out trading the forex markets or any other markets for that matter, Bruce is saying that beginning traders should cut the size of the trade their placing in half before they actually place it because it’s likely to be way more than what they should be risking.
Michael Marcus taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.
Michael Marcus was himself a very successful trader and actually taught many of the really successful traders you’ve probably heard about before how to trade the markets. One piece of advice Marcus gave Bruce was you always had to be willing to make mistakes and that it was okay to actually make mistakes when trading.
Retail traders view mistakes differently.They believe making a mistake is a bad thing and associate it with being bad at trading itself which isn’t true. Making mistakes is a part of trading which you must live with, its essential for your learning process too, if you never made any mistake you wouldn’t be able to find out what you might be doing wrong or how you could improve your trading to get better results.
Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s temperature.
This quote is a little jab at the people who say fundamentals are all you need to trade the market.
Since the beginning of trading there has been an ongoing argument between fundamental traders and technical analysis traders who go back and forth over which method is superior in trading the markets. Fundamental traders say there isn’t any need to look at any charts because the fundamentals tell them all they need to know, while traders who use technical analysis say fundamentals don’t matter and everything you need to make money is contained on the charts.
With the quote Bruce is basically saying fundamental traders who don’t think there is any point in looking at a price chart of an asset are making a mistake because the charts hold a wealth of information which cannot be discovered purely from looking at fundamentals alone.
It’s important to note in one of the market wizards books Bruce says he used both fundamental analysis and technical analysis to make his trading decisions.
My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks. The emotional burden of trading is substantial; on any given day, I could lose millions of dollars. If you personalize these losses, you can’t trade.
It takes a while for beginning traders to get a grasp how basic things work in the market and what you should and shouldn’t do when it comes to trading the markets themselves. A lot of traders end up blowing their first accounts soon after they have begun trading because they fail to understand the risks involved with trading financial markets.
They think risking 5% – 10% off their account on a single trade is small and is standard practice for people who trade the markets. What they fail to realize is when really 5% – 10% is a huge amount of money to be risking on a single trade.
If a trader risked 10% off his account on each trade he places it means he only needs to lose ten trades in a row to lose all of the money in his account. It may seem unlikely to stumble upon ten losing trades in a row but it can and does happen especially to beginning traders who have yet to form a trading plan or learn a robust trading strategy.
If you stick to only risking 1% – 2% ( which is still to high in my opinion ) of your account on each trade you’ll be able to survive any losing streak which comes your way and you’ll have enough time as a beginning trader to survive the first few months of trading which are crucial in your development.
The Heisenberg principle – If something is closely observed, the odds are it is going to be altered in the process. The more a price pattern is observed by speculators the more prone you have false signals; the more the market is a product of nonspeculative activity, the greater the significance of technical breakout.
This is very similar to what I was saying in yesterdays article about the reason why trend trading stopped working.
The trend is a concept which most traders have knowledge on and use in their trading of the markets. Due to the amount of people who monitor the trend and use it heavily in their decision-making process the concept of trend itself has changed to accommodate for these people actions.
The Heisenberg principle applies to a lot of things we see in the market, for example a really obvious head and shoulders pattern is unlikely to result in a successful trade in the event of you trading it because so many other traders will also be trading the pattern and it will become more profitable for the banks to move the market in the opposite direction to make all the people trading the head and shoulders pattern lose money.
Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis. I never think about other people who may be using the same stop, because the market shouldn’t go there if I am right.
Bruce is stressing the importance of having a stop-loss placed on each trade you take. He says the only way he can sleep at night with positions open is because he has a stop in the market which he knows will limit his losses in the event of something unexpected happening whilst he is asleep.
He also mentioned that the size of the trade he’s placing is determined by the stop-loss and the location of his stop-loss will always be based on something he see’s on the charts, which is probably true for most of you traders reading this.