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Market Wizards: Interviews with Top Traders by Jack D. Schwager

March 24th, 2009

Bruce Kovner – The World Trader

When an important fundamental development occurs, the initial direction of the market move is often a tip off of the longer term trend.  The market usually leads because there are people out there who know more than you do.

The more a market is the product of non-speculative activity, the greater the significance of technical breakouts.  For example, if everybody believes there is no reason for corn to break out, and it suddenly it does, the chances that there is an important underlying cause are much greater.

Kovner (also) advises to always have a predetermined stop whenever you enter a position.  He adds that you should always put your stops beyond some technical barrier, so you don’t get taken out by a temporary erratic move.

One interesting topic Kovner discusses is his approach to fundamental analysis in the currency markets.

I assume that the price for a market on any given day is the correct price, then I try to figure out what changes are occuring that will alter that price.  One of the jobs of a good trader is to imagine alternative scenarios.  I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed.  You keep trying them on one at a time.  All of a sudden, you will find that in one picture, nine out of ten elements click.  That scenario then becomes your image of the world reality.

Kovner also likes to decide understand where the market consensus is and then looking for non-confirmation in the markets.  For example, if all the newsletter writers and financial commentators are bearish, but the market is acting bullish, he wants to go long because he knows all of the ‘consensus’ bears out there will have to cover their shorts.  The opposite is also true.

Kovner has a similar strategy to Marcus in terms of limiting position size.  He recommends not risking more than 1 percent of his equity capital on any single trade.  He also says to pay close attention to correlation of those bets.

When asked to give advice to a novice trader, Kovner offers the following:

Risk management is the most important than to be well understood.  Undertrade, undertrade, undertrade is my second piece of advice.  Whatever you think your position size ought to be, cut it in half.  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.  Also, novice traders personalize the market.  Whenever a trader says, “I wish” or “I hope” he is engaging in a destructive way of thinking because it takes attention away from the diagnostic process.

An important strategy that Kovner employs is to place his stops far away or ina position that is difficult to reach easily, but then to spread out his positions into many different trades.  This is different than what most novice traders do when they have only a few trades, but place tight stops.  The novice approach leads to getting pre-maturely stopped out of winning trades and general overtrading.  The moral is: place your stops at a poitn that, if reached , will reasonably indicate that the trade is wrong, not at a point determined primarily by the maximum dollar amount you are willing to lose per contract.  If you chosen stop point implies an uncomfortably large loss per position, trade a smaller position.

Kovner also had a “going bust” trade.  So he was not immune to failure at the outset of his trading career.  His lesson from that event was to not trade impulsively.

Richard Dennis – A Legend Retires

Dennis has a trading rule which is to get out of the market and take some time off after you have a destabilizing loss.

Another maxim he follows is to do nothing if he is unsure or if he is getting conflicting signals from his personal opinions and from his technical sytems.

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