Sunday, October 28, 2012

Overtrading - with Bruce Kovner

In my own opinion, overtrading (trading too large positions relative to your equity) is the no.1 reason that inexperienced traders tend to blow up their accounts. Following up from my two recent posts about this subject, here is a short extract from Bruce Kovner's interview with Jack Schwager in Market Wizards talking about this very topic. Kovner has achieved incredible results in his trading career, so his views should be listened to:

"Q: When you compare the trainees that made it to the majority that did not, do you find any distinguishing traits?

A: They are strong, independent, and contrary in the extreme. They are able to take positions others are unwilling to take. They are disciplined enough to take the right size positions. A greedy trader always blows out. I know some really inspired traders who never managed to keep the money they made. One trader at Commodities Corporation - I don't want to mention his name - always struck me as a brilliant trader. The ideas he came up with were wonderful; the markets he picked were often the right markets. Intellectually, he knew markets much better than I did, yet I was keeping money, and he was not.

Q: So where was he going wrong?

A: Position size. He traded much too big. For every one contract I traded, he traded ten. He would double his money on two different occasions each year, but still end up flat."

In my e-book and my own writings on this blog, risk management always comes before system management (the method for your entries and exits). Prudent risk management allows you to develop the necessary mindset to achieve long-term trading success; losses are contained, keeping you in the game while you overcome the psychological barriers you may encounter.

There are many reasons that people overtrade - overconfidence in their ability, desperation to make money quickly, the list goes on. It is possible in this business to have a winning system, but still lose if you overtrade. Get your risk control sorted as soon as possible, and good things will happen.

As Larry Hite said in his Market Wizards interview: "I have two basic rules and winning in trading as well as in life:

(1) If you don't bet, you can't win;
(2) If you lose all your chips you can't bet."

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