Bruce Kovner Trading Strategy & Philosophy

Bruce Kovner is one of the most influential and successful global macro traders in history. 

As a co-founder of Caxton Associates, a highly successful hedge fund, his trading strategy blends a deep understanding of macroeconomic factors with technical analysis and strict risk management.

Bruce Kovner is among the many successful traders who emerged from the renowned Commodities Corporation.

Key Takeaways – Bruce Kovner Trading Strategy & Philosophy

• Trade with a Strong Market View – Kovner emphasizes that every position must have a solid fundamental reason behind it, with technical analysis used to refine and clarify that view.
• Manage Position Size – Novice traders often risk too much. Kovner advises risking only 1-2% per trade to avoid the emotional burden of large losses.
• Undertrade for Safety – Off the above, Kovner consistently advises traders to “under trade,” reducing position sizes to manage risk effectively.
• Emotional Control – When his emotional balance is disturbed, Kovner exits all related positions to avoid trading under emotional influence.
• Don’t Trade Bigger Than You Think – Watch correlations, so you’re not trading bigger positions than you think.

Introduction to Bruce Kovner

In 1977, Kovner was 31 and had been working on his PhD, specializing in government.

But he had not finished and worked various jobs – political campaigns, dabbled in music (the harpsichord), was a writer, and cab driver.

At this point, he borrowed $3,000 on his MasterCard and began trading on his own. 

His first two trades, in copper and interest rate futures, earned him $1,000. 

His early trading experiences were the most impactful. 

One particularly unforgettable moment occurred in the soybean market.

A shortage in soybeans drove his $4,000 position up to $45,000 in just six weeks. In a moment of irrationality, he removed a hedge that would have protected him if prices dropped—and they did. 

Panicking, Kovner quickly liquidated his position, suffering a $23,000 loss (i.e., down from his $45,000 high water mark but much greater than his $4,000 initial position). 

Even after this setback, he still had $22,000, five times his initial investment.

“I had a huge gain but lost half in an hour,” Kovner recalls. “I was physically sick for a week after closing out the trade.” 

Looking back, he sees the experience as teaching him the importance of managing risk and developing systems to control it.

Kovner’s Trading Strategy

Global Macro Focus

Kovner’s trading philosophy has a global macro focus. 

This means that Kovner examines large-scale economic and political trends to determine how they will impact various asset classes. 

Unlike traders who focus on specific stocks or sectors, global macro traders like Kovner consider broad themes such as central bank policies, interest rates, currency exchange rates, and commodity prices.

Kovner excels at identifying these macroeconomic trends early and determining how they will transpire through global markets. 

For example, suppose he anticipates a change in Federal Reserve policy. 

In that case, he might try to understand how that will affect the US dollar, commodities like gold and oil, and even bond yields globally.

Kovner doesn’t react to what’s happening, but rather forecast how policy changes or geopolitical events will alter supply and demand dynamics, which ultimately drive price movements.

Envisioning Futures Scenarios

Kovner looks for situations where the market consensus doesn’t align with what’s most likely to transpire. 

He looks for moments when many market participants are likely to be wrong.

A skilled trader, according to Kovner, must be able to imagine alternative scenarios. 

Most tend to believe that the future will be a slightly modified version of the present, but that’s not always the case.

He continually forms mental pictures of how the world might change and waits for one of those scenarios to be validated. 

He tries on these ideas one by one, fully aware that most will prove incorrect or only partially accurate. 

But eventually, a moment arrives when almost every element in one of these mental pictures aligns. 

Fundamental Analysis

Kovner’s strategy focuses on fundamental analysis. 

This involves looking at economic data, news, and research to form an overarching view of the market.

He places an emphasis on understanding the forces behind economic indicators such as employment rates, inflation, and GDP growth. 

He also closely monitors government policies, especially central bank decisions regarding interest rates, as these have a direct impact on currencies and other asset classes.

Kovner has been quoted saying that a lot of his success stems from capitalizing on the missteps of “stupid governments.”

This suggests that he actively seeks to identify and exploit the market imbalances created by the policy errors of central banks and governments.

His approach is not about making small gains from short-term market fluctuations as a day trader might, but about identifying significant market shifts that are driven by underlying economic conditions.

He asserts: 

I almost always trade on a market view; I use technical analysis a great deal and it is terrific, but I can’t hold a position unless I understand why the market should move. Every position I take has a fundamental reason behind it. But I would add that technical analysis can often clarify the fundamental picture. 

For example, he might analyze a country’s inflation data alongside its central bank’s response to anticipate how the currency will move in the future.

Technical Analysis

Although Kovner is primarily a fundamentally driven trader, he also incorporates technical analysis into his decision-making process. 

He uses technical analysis to refine his entry and exit points, so that his timing in the market is more precise.

Kovner pays attention to price momentum, support and resistance levels, and trend indicators. 

Bruce Kovner views technical analysis as an important tool, much like a thermometer is to a doctor.

He compares traders who ignore charts to a doctor who refuses to take a patient’s temperature – ignoring important information.

To Kovner, responsible market participants need to understand the current state of the market, whether it’s, e.g., “hot and excitable” or “cold and stagnant.”

This knowledge is essential for gaining an edge in trading, as it provides context about the market’s behavior and potential direction.

Kovner describes one of the key features of a bear market as sharp downward movements followed by quick retracements.

In such markets, the best strategy is often to use these sudden counter-trend rallies as opportunities to enter new positions.

While Kovner believes technical analysis has value, he also recognizes its limitations. He argues that it contains both useful insights and “mumbo jumbo.” 

He criticizes some technicians who overhype technical analysis by claiming it can predict the future. In reality, Kovner sees technical analysis as a framework to track past behavior. 

It doesn’t forecast future events but helps traders understand what past activity might suggest about future market movements.

It’s up to the trader to interpret this data and make informed decisions about how other traders may behave.

Technical analysis, in Kovner’s view, captures the voice of the entire market.

It can reflect unusual behavior when new chart patterns emerge, signaling something out of the ordinary. For this reason, he places great importance on studying price action closely. 

He believes charts provide insights into market dynamics and potential imbalances.

By focusing on these details, Kovner stays alert to possible shifts in the market, helping him make informed decisions about his positions.

Risk Management

Kovner is known for his strict discipline in cutting losses and protecting capital.

He believes that no trader can avoid losses entirely, but long-term success is in minimizing those losses and avoiding large drawdowns.

Kovner says:

“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.”

Kovner also practices the principle of cutting losses quickly. 

When a trade moves against him, he doesn’t hesitate to exit the position to preserve his capital. 

This approach contrasts with many traders who hold onto losing positions, hoping they will eventually turn profitable.

He also avoids taking on more risk than he can afford.

Kovner believes in sizing his positions according to the level of risk in each trade, so that no single loss will significantly impact his overall portfolio. 

Kovner’s First Rule of Trading

The first rule of trading, according to Kovner, is not to find oneself in a situation where large losses occur for reasons that aren’t fully understood. 

While there are likely many “first rules” in trading, Kovner emphasizes that understanding why losses happen is essential to avoiding them.

Under Trade

Kovner believes that risk management is the most critical aspect of trading. 

His advice is to “under trade” consistently. 

He advises traders to cut their positions at least in half from what they initially think is appropriate. 

This cautious approach stems from his experience and understanding of how overexposure to risk can be detrimental.

This lines up with more modern “engineered” approaches to markets where individual positions are like individual Lego blocks that aren’t that influential on their own but collectively build up to a portfolio optimized on specific goals (e.g., return needs, risk profiles, income/cash needs, liability management, etc.).

Through painful lessons, Kovner has learned that mistakes in position correlation often lead to some of the most serious trading problems. 

For example, if a trader holds eight highly correlated positions, they’re essentially trading one position that is eight times larger than it should be. 

This kind of risk concentration is dangerous and can lead to large, unforeseen losses.

We cover this concept more here.

Predetermined Stops

Kovner is a firm believer in using predetermined stops for every trade. Before entering any position, he knows exactly where he will exit, which allows him peace of mind.

The size of his position is directly related to the stop level, which is set based on technical factors. This disciplined approach helps him manage his risk effectively.

As mentioned his experience, novice traders tend to take on positions that are far too large – e.g., risking 5 to 10 percent of their capital on a single trade when they should only be risking 1 to 2 percent.

Kovner does not concern himself with the idea of stop vulnerability.

From his perspective, if the market moves to a level where his stop is triggered, then his analysis was wrong in the first place.

The only thing that truly bothers Kovner in trading is poor money management.

Occasionally, he takes a loss that is larger than it should be, but he is never troubled by the process of losing money as long as the losses result from sound trading techniques.

Process over result.

Markets Are Impersonal

A common mistake traders make, according to Kovner, is treating the market as a personal adversary.

He reminds traders that the market is completely impersonal and indifferent to whether they make or lose money. Any belief that the market is acting against them personally is misguided.

Finally, Kovner warns against engaging in wishful thinking. When a trader starts saying “I wish” or “I hope,” they are falling into a dangerous mindset.

These emotions divert attention away from the necessary diagnostic process, which is important for making informed, rational trading decisions.

How a Bruce Kovner Trader Might Work

What we have below is purely hypothetical to show how Kovner might think about a certain trade.

• Trade Idea – Long the Japanese Yen (JPY) against the Australian Dollar (AUD)

Fundamental Analysis

• Japan – The Bank of Japan (BOJ) has maintained its ultra-loose monetary policy for an extended period to stimulate economic growth. However, inflation in Japan has been steadily rising, exceeding the BOJ’s 2% target. There’s growing pressure on the BOJ to tighten monetary policy by raising interest rates to combat inflation.
• Australia – The Reserve Bank of Australia (RBA) has been raising interest rates aggressively to curb inflation. However, Australia has a high level of household debt, and further rate hikes could significantly impact consumer spending and economic growth. There’s a risk that the RBA might pause or even reverse its rate hikes sooner than expected if economic conditions deteriorate.

Kovner’s Approach

Kovner would analyze the following:

• Inflation Data – He would closely monitor inflation trends in both Japan and Australia. If inflation in Japan continues to rise while the BOJ remains hesitant to raise rates aggressively, it could put downward pressure on the JPY. Conversely, if the RBA raises rates excessively, potentially harming the Australian economy, it could weaken the AUD.
• Central Bank Statements – Kovner would pay close attention to communications from both the BOJ and the RBA for clues about their future monetary policy intentions. Hawkish signals from the BOJ (suggesting potential rate hikes) could strengthen the JPY, while dovish signals from the RBA (hinting at a pause or reversal in rate hikes) could weaken the AUD.
• Economic Growth – Kovner would understand the economic outlook for both countries. Strong economic growth in Japan could support the JPY, while concerns about a slowdown in Australia could weigh on the AUD.

Trade Execution

If Kovner’s analysis suggests that the BOJ is likely to tighten monetary policy while the RBA might be approaching the end of its tightening cycle, he could initiate a long JPY/short AUD trade. 

This means he would buy the JPY and simultaneously sell the AUD, anticipating that the JPY will appreciate relative to the AUD.

Risk Management

Kovner would use strict risk management rules, including:

• Stop-Loss Order – He would place a stop-loss order to automatically exit the trade if the JPY/AUD exchange rate moves against his position beyond a predetermined level.
• Position Sizing – He would carefully determine the size of his position to make sure that the potential loss wouldn’t exceed his risk tolerance.

Kovner’s Trading Philosophy

Belief

Michael Marcus (a student of famous trader Ed Seykota) taught Bruce Kovner the basic lesson that it was possible to make a lot, not just what you earned recently or what you earned in a separate career.

Kovner realized how easy it is to miss the point that such success (e.g., making millions of dollars) is truly attainable, but Marcus made him believe it was within reach.

Maybe a bit Tony Robbins-ish, but eliminating self-limiting beliefs is important.

Kovner on Why Some Traders Succeed and Others Don’t

When reflecting on why some traders make it and others don’t, Kovner finds it difficult to define.

However, in his case, he identifies two key factors.

First, he possesses the ability to envision a world different from the present and to truly believe those changes can occur.

He can imagine scenarios like soybean prices doubling or the dollar dropping to 100 yen.

Second, he remains rational and disciplined, even when under pressure.

Harmful emotions tend to be the worst thing in trading.

On Emotions

​​​​ “To this day, when something happens to disturb my emotional equilibrium and my sense of what the world is like, I close out all positions related to that event.”

Adaptability

Adaptability is a cornerstone of Kovner’s trading philosophy.

Markets are dynamic, and what works may not work in the future. 

Kovner believes that traders need to continually reassess their strategies and adapt to new information.

In the global macro space, geopolitical events, government policies, and economic conditions can change quickly.

This might contrast with, e.g., longer-term, value investors who expect a thesis to transpire over time.

Discipline

Trading can be emotionally taxing, and it’s easy to make impulsive decisions in the heat of the moment. 

Kovner, however, maintains strict discipline in following his trading plan and managing his risk.

Discipline also extends to Kovner’s approach to risk.

He doesn’t allow himself to take unnecessary risks, even when he feels confident about a particular trade. 

Everything that’s known is discounted into the price, and these prices are determined by fairly sophisticated participants.

And even if you do have an edge, you can’t know how long it’ll take before this point will be reached, if ever.

So, undersizing trades is important.

Patience

Rather than chasing every opportunity, Kovner waits for high-probability setups where many different factors align. 

Kovner believes in letting the market come to him. 

This patient approach has allowed him to make larger profits on well-timed trades, rather than diluting his returns by taking too many trades.

Continual Learning

Even after decades of success, he constantly looks for new information and refines his understanding of the markets.

He understands that markets evolve since edges tend to not last long – as other traders pick up on them – and staying stuck in one’s ways or relying solely on past success is a recipe for failure.

Other Insights from Bruce Kovner

While Kovner hasn’t written any books himself, his insights can be found in Jack D. Schwager’s “Market Wizards” where he provides a detailed interview about his approach to trading.