You may never have heard of Bruce Kovner, but he is perhaps one of the world’s most influential traders. He is one of the biggest movers and shakers in the interbank currency market, and plays an equally large role in the futures market. His company, Caxton Associates, is one of the world’s biggest hedge funds, managing more than $14 billion of assets.
After early stints in politics and driving a cab, the Harvard-educated Kovner found his calling in the commodity and currency markets. Since then, he has gone from strength to strength, building a reputation for both extreme intelligence and reclusiveness. Since he keeps to himself, it is well worth paying attention to the occasional advice he has for other investors.
A Guest Post by FXTM
What sets successful traders apart?
Kovner isn’t completely certain why some traders are successful whereas others are not. However, he does point to two key attributes.
First of all, successful traders are able to envisage a world which is radically different to what exists today, and believe that such a world is a distinct possibility. By being able to accept the prospect of unprecedented change, they can take a different – and often profitable – view of the market.
Second, no matter what is happening in the market, successful traders maintain their discipline and take a rational approach to investing at all times.
Mistakes are okay
According to Kovner, mistakes are not something that you should go out of your way to avoid. Making mistakes is how you learn – as long as you apply your best judgment, being wrong the first time leads to better judgment and profits down the road.
However, you should never take risks when you really don’t understand what is going on – this is a recipe for disaster. Kovner points to the fact that he closed out all his positions before Black Friday in 1987 because the market felt wrong and he didn’t know why. Doing this saved him from huge losses, and it can save other traders as well if they feel they are entering into the unknown.
Overconfidence can kill
Kovner says that the most successful traders are willing to take positions that are contrary to the market wisdom because they have confidence in their market understanding.
However, he also states that being too confident is a fatal flaw. He cites the case of one trader he regarded as inspired but who was unable to hang on to his profits.
The problem was overconfidence – he took unjustified risks by opening positions that were too large, leading to occasional massive wins mixed in with way too many big losses. In other words, it doesn’t matter how well you understand the market – unless you manage your risk, you are going to end up losing in the long term.
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