Trading Lessons from the Poker Table

If you know anything about us, you’ll know that we enjoy studying disciplines outside of trading to see if there any transferrable skills that we can use to help build our mental edge as traders, and poker just so happens to be one of those cases! In today’s episode, Mark discusses some of the similarities between poker and trading and also breaks down some key lessons that professional poker players can teach us about successful trading. For those not familiar with the game of Texas Hold Em’ poker, players win by betting against other players until one person is left with the entire pot. The betting is based on the perceived value of the hand that they hold relative to what they believe the other opponents at the table have. There are several betting rounds between the flop, the turn, and the river and success take discipline, patience, and diligence! Interestingly enough some of the best candidates for Wall Street trading jobs back in the day happened to be professional card players because these individuals understood that if you managed risk accordingly and executed your edge with consistency, that you were not gambling, in fact, you were simply playing the ODDS! What are the synergies between trading and poker?  Risk 

• Poker players have a pot or stack

• When you have what you perceive to be a decent hand in poker, you will bet some of the pot

• Have to risk when you believe that you have a chance of success

• The guy that is betting loosely and playing each hand will get lucky from time to time but at some point, someone is going to have a much better hand and will clear him out.

• Traders have an account and will bet a certain portion of the account size when a setup forms as part of their trading plan

• If you are ill-disciplined and betting on whatever looks good, then you might survive for a while with proper risk management, but eventually, you will get wiped out

• Managing risk and tolerating large risk when the time is right

• Knowing when to put in a certain bet and when to go all-in; in poker, there are some formulas as it relates to correct bet sizing as a percentage of a pot that is in there
• With trading, the general formula is to risk no more than 1-2 % of your risk capital

Patience

• When playing poker, you are looking for your best hand; eventually, you get a hand that you want to play and you can start betting some of your pot on it

• The amateur or hobbyist plays for the thrill whereas the professional plays to win

• In trading, you are waiting for your highest quality setups and you do not want to get involved in the market for the sake of action but only when your edge is present

• A lot of the time is spent sitting on the hands and doing nothing

Self-Control or Awareness

• Both poker players and traders have to be self-aware of their emotions so that they do not impact their decision-making processes
• If you are swaying from one polarity to another (angry on one side; excited on the other side) you become vulnerable to going on tilt

3 Things that Traders can learn from Professional Poker Players: Disciplined Money Management 

• In poker, a player’s main challenge is to stay in the game long enough to have the chance at winning some big pots. To do this, stringent management of their chips is paramount! Going all-in can bring a big winning but it can also get you a quick exit if things don’t go your way.
• Proper bet sizing is important to stay in the game in the face of a streak of losing hands.

• The concept of “tilt” in poker describes a state in which sheer frustration with the game takes over and distorts one’s betting

• If a player were to go on tilt after each losing hand, overjoyed with winning hands, and irritated with mucked hands, they would be relatively easy to read and would be making decisions based on emotions instead of probabilities

• The goal is to win the game and not the individual hand

• In trading, a trader’s main job is to manage risk and to stay in the game long enough by cutting losers short and letting winners play out.

• Trading on tilt arises out of the expectations of a certain outcome; if a trader is not emotionally prepared for the possibility of losing, they will be thrown off by losses.

• By needing and expecting to win we set ourselves up for the tilt state

• Let the probabilities play out and accept there will be winning and losing periods

• The Pareto principle holds true for both these fields; 80% of gains come from 20% of trades or hands

• Professional poker players know to bet strong and add to their bets when they hold a strong hand

Requires a willingness to NOT play 

• The best poker players know when to hold 'em and when to fold em

• They don’t make bets when the odds aren’t on their side

• If a player has a poor hand, they can “muck” it which simply means fold and wait to bet on a better hand

• Good players know there are times to bet and not to bet; they will bet when the odds are in their favor and when they perceive weakness among other players at their table

• In trading, you can decide when to bet or not bet and you can also decide how much to bet if you plan on doing so.

• If a poker player played every single hand they were dealt, over time the odds would catch up with them and they would lose their entire stake

• You can't win at poker until you master the art and science of not playing

• Consider the prior market action as cards you are dealt and the current market behaviors representing the new cards being revealed.

• As a trader, you will want to stand aside if market conditions do not reflect good opportunities as defined in your trading plan. Knowing when to play and how aggressively to play are major elements of success in both professions

• If you only traded on the days when you have the “odds” in your favor, how would your experience change? How many days would you “muck”?

Winning requires knowing who your up against 

• In poker, the way that you bet will vary greatly based on who you are playing against. You’ll bet differently playing against amateurs at the local casino versus playing the masters against tournament professionals.

• Successful poker players learn to spot patterns and tells of the players they are up against and will use these as considerations to make betting decisions.

• In poker, you are always betting against what other people are thinking and trying to get into your opponent's heads

• Example of Daniel Negreanu and how he gets into the heads of his opponents by talking to them about the hands that he believes they have

• Subtle tells around the table will tell the poker player it's OK to bluff with a relatively weak hand.

• Similarly, traders have to learn how to understand the psychology of those who they are trading against, and this is displayed visually on the charts. By understanding who you are up against and identifying when they are “trapped” in the markets, you are able to increase your probabilities of success.

•  By getting “into the head” of competitors you are able to make better-informed trading decisions.

• Those that are best in predicting price action are the best at predicting people; the market is effectively social; value is a collective social perception.

• Poker players and short-term traders need to have an edge and know what it is, but they also have to be able to use real-time judgment as to when to proceed with so-so odds.

Resources

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• Catch up with our earlier episodes: Mind Over Markets Podcast