Bruce Kovner, the Macro Trader

Bruce Kovner interview in the book The Market Wizards by Jack Schwager

Kovner is one of the most succesful trader and hedge fund managers of all time.

Despite his start as a trader later in his career his rise has been meteoric.

Before he found a job as a trader, he was driving a cab and giving courses.

The fact is that his first contact with trading was after he borrowed $ 3.000: a bold move that I do not really recommend anybody. But Kovner was valiant and did it.

Starting your trading career with borrowed money is not the best idea, since the great majority of traders lose their first years.

Normally he should have lost that loan. But the reality is that he started winning in a big way.

In a matter of months, he was up to $ 20.000, and just recently he had managed to have $ 45.000. And the most incredible fact is that he did this by trading a spread between different futures contracts.

Bruce Kovner trader

He bought June soybeans futures and sold November ones. Being spreads he could leverage even more: he was leveraged to the maximum. He thought that the contango was too big.

After winnig that risky trade he was hired by Michael Marcus´s company, who taught him a lot of what he knew (and he knew a lot). And that is what Kovner needed to become a giant: being one of the best futures and forex interbank traders ever.

His trading size was so big that he could not trade some of the futures contracts due to their moderate liquidity effectively.

Bruce Kovner quotes

In the interview, he said things like this:

I had a plan. I would wait until the market moved up to a certain level and then retraced by a specified amount before adding another unit. My pyramiding did not turn out to be the problem.

This is what he did when he took that massive spread in soy. He even said that he was so leveraged that he did not understand how risky the position was.

He was lucky then after all.

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.

Well, you know, this is one of the most important trading quotes of all time. That is a short way to tell that when you are wrong you cut your loss, and when you are right you have to let it ride to the sky.

 

A greedy trader always blows out

After some years, he realized that the most sensible way of trading was not risking too much in each operation. If you are too brave and risk 10% in every trade, you will most probably kiss the canvas quickly.

My point is that there are well-informed traders who know much more than I do.

He meant that when the market breaks up unexpectedly and with strength, it is because there are people who know the market and are buying or selling for some good reasons. In that case, the best a trader can do is to follow the tape, and if your opinion was different than that of the main trend of the market you should consider to change it.

Fundamentalists who say they are not going to pay any attention to the carts are like a doctor who says he is not going to take a patient´s temperature.

Kovner used charts generously. But this does not mean he did not use fundamental analysis. On the contrary, he would use it his way.

He was a fabulous macro trader.

He was fond on studying the economics and political developments of the nations, and then invest accordingly.

If corn is in a tight consolidation and then breaks out the day the Wall Street Journal carries a story about potential shortage of corn, the odds of the price move being sustained are much smaller.

As he would say somewhere else in the interview, that was one of the signals that the Russians are buying. And for him it was one of the best opportunities in the markets: when states intervene to try to “solve” some situation. And there it is a professional trader has to act. They just follow the predicted trend. Those traders are very small when compared with the true (evil) speculators: Central Banks.

The same happened when the soviet state bought massive amounts of wheat. In those cases, the breakout was so big that the trade was obvious.

In fact, it could even be counterproductive, since the time and energy I spend concentrating on coffee diminishes my focus on the currency markets, which I trade far more heavily.

Bruce Kovner Forex

He confesses the great problem a big trader has to face: when you manage hundreds of millions or billions, the futures markets do not provide enough liquidity to trade in a big way. For that you go to the forex interbank markets, or maybe the bond market.

In a bear market you have to use sharp countertrend rallies to enter positions.

That seems to be his way of trading the short side: waiting for the market to show a bear trend first and then trade the first reaction. This is why because bear market moves are so violent sometimes that it is difficult to get in time to some trades.

First of all, I try very hard not to risk more than 1 per cent of my portfolio on any single trade. Second, I study the correlation of my trades to reduce my exposure.

A lot of people should write down those rules. Never risk too much on a single bet, and never forget that there are very correlated assets.

For instance, if I am long the SP500, try not to be long the DAX, the FTSE, and some more, because all of them together work out as a single trade.

The best thing is to be long one market and perhaps short in another (He really loved spreads).

This is one of the best interviews in the book of Schwager. Totally recommended.