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Poker & Trading (leveraging on poker success)
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Poker & Trading (leveraging on poker success)

  #1 (permalink)
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Poker & Trading (leveraging on poker success)

Hi guys, this thread is for those who have been successful professional poker players, or at least are significant students of the game, and are struggling in the transition to trading. I do not declare myself as a successful professional poker player, but I did spend a good 3 years (and am still doing so) intensively studying the game of poker. I consider myself to be a +EV cash game player (at least with my friends) and on the online circuit before Black Friday.

I am "new" to trading and when I started trading, I did not think about the cross applicability of the mindset of professional poker players and how it relates to trading. After intensively trading for 2 months, I start to realise the huge similarities between the two, and how the psychology between the 2 are extremely cross applicable.

Short brief for those who do not play poker, poker (like trading) is a game of incomplete information. You do not know the cards in your opponent's hand, and neither do you know the cards that will be dealt on the table and the actions that your opponent will take as the hand progresses. This creates a similar psychological challenge on the individual, similar to that of trading. Both involve (potentially) high stakes and thus this brings in all sorts of psychological complications that all of us reading futures.io (formerly BMT) will be familiar with.

Selection of starting hands
When I studied the game of poker, I learnt all about the expectancy of starting hands and how you should be extremely selective of the hands you play to achieve a positive expectancy in the game.

Applicability to trading: The selection of starting hands in poker is akin to the selection of your entry in the market. We all have our own setups and we MUST wait patiently for our setups to occur. The tricky part behind trading is HOW we determine our setups. By virtue of the game, our setups differ one trade to the next. This is why trades occur, everyone thinks that they hold pocket AA whenever they enter the trade (if they entered rationally).

Hence, once you have defined your setup in your trading rules, do not deviate until you are comfortable with the markets. As it applies in poker, the more competent you are in the game, the more you can choose to open up your selection of hands. In trading, the moment you reach a certain level of competence and comfort, you should be able to also open up your selection of trades by taking counter-trend, 2 tick scalps, etc type of setups which novices should NEVER attempt to do so. But as stated, this is purely subjective and it is not the entry criteria that is in play, but the ability to MANAGE the trade as you go on. 7-2 offsuit is never a profitable hand by any stretch, but a professional poker player can read the action and his players, and will be able to play that comfortably GIVEN the correct situation etc. The playing of the hand is the SAME as how you manage a trade.

"OMG! I shouldn't have folded 7-3o preflop. I hit trips!"
This is a common mistake of novice poker players, where they whine about the loss of the opportunity to make a big pot when they had totally no business playing an extremely -ev hand to start with.

Applicability to trading: The exact same situation occurs in trading, where the market does a crazy move in a singular direction and you wonder "OMG! I should have got in before the NFPs!". If the setup did not occur, just let it go. You would be losing in the long run if you keep attempting to catch those trades that are not part of your plan. This is very similar to playing ALL hands in poker in order to catch the elusive trips on the flop. You will get crushed. Same for trading. Attempting to catch all ticks in the market = you will get crushed.

Fold when you are beat (or think you are)
When you know you are beat, or have a very slim chance of winning, FOLD - and be happy about it. If the odds are stacked against you, you may make a "hero" call sometimes, but in the long run, you will get crushed.

Applicability to trading: Simple analogy - YOUR STOP LOSS. This could also be a further element for the "scratch" for the more experienced traders. Professional poker players do not wait till the river to fold. They fold at any street if they find that the EV in the hand has diminished significantly. Same for trading. The moment you think the market is against your position and even though it may reverse and hit your profit target, sometimes its better to scratch and re-evaluate, or wait for the setup to occur again.

Pocket AAs lose 15% of the time. Bad beats happen
The strongest hand in Hold'em, AA loses 15% of the time against a random hand (can't remember the exact number, but it isnt important). As a pro, we take it on the chin and do not let it affect us in the next hand. Same when you flop a set or have some huge made hand on the flop. You will lose occasionally. That is the beauty of poker.

Applicability to trading: Quite an easy analogy. You can play perfect poker - and still suffer losses in the hand or in the session. I am sure you guys can see the analogy. Losses in trading are perfectly normal and perhaps the reason why it is a profitable endeavor if you master it. So take the loss and move on to the next hand (trade). Do not let it affect your mood or the next trade.

The hands will keep coming if you sit at the table
Unless you leave the table, or become broke, hands will keep on being dealt to you. So do not rush it, and do not bust your bankroll.

Applicability to trading: This one should be easy. Markets are ever-present. Do not rush it. Play your hands (trades) as you have planned, and nothing more. Protect your bankroll at all times. The trade (hand) is insignificant to your bankroll, or your stack size.

DO NOT TILT. If you tilt, stop playing and take a breather
Obvious relation to trading.

Never sit at a table where you do not have at least 50 buy-ins in your account
When playing online poker, this was a rule for me. I had at least 50 buy-ins in my account for whatever stake I played.

Applicability to trading: Your risk per trade! Very very important.

The rake will murder your edge if it is too high
Every hand is raked by the casino. In some live cash games, the rake is way too high to make it profitable for any player at the table, or players may play too many hands that make their edge diminish due to the rake they play.

Applicability to trading: Watch your commissions. This is perhaps the least important out of all that I have stated, but if you are with a broker that charges large per RT, this may diminish your edge significantly. So sourcing for the most reliable and cheapest broker may play a role in becoming profitable, BUT it is probably the last thing on your list.

That's it folks. There are probably a lot more connection between poker and trading. I write this with the assumption that you do know how to play the game of poker and that you are a +EV player that can comfortably play the game for profit. I hope this short article can help players make the transition better to the game of trading. I myself have had problems in trading, where I keep wanting to take every tick of the market. This is amazing considering the fact that when I play poker, I can sit at the live table and fold hands continuously for 30 min without wincing. I know that my game is +EV and my strategy works in the long run. I hope that is the same for my trading (I know it is, last I checked when I followed my rules, I have a good edge in the markets).

Hence, for myself at least, I will attempt to play a mechanical game of trading (for my entries), and only hone my skill in trade management. I will end this before it becomes too much of a journal. Hope this helps!

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  #3 (permalink)
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Thanks for the thread. I know that some firms even seem to make it public that they have a penchant for poker - Peak6 comes to mind.

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You drew certain symmetries between the psychology of poker gameplay with the psychology of trading. I personally think that the comparisons between trading and poker are often over-hyped (but everything you've said makes good sense to me). The reason I say this is that psychology isn't the 'bottleneck' in trading, since anyone can have sufficient self-control with the right exposure and thereafter any increasing skill in poker seems to draw diminishing returns. On the other hand, nothing about poker prepares you for the common challenges of trading - one of most important of which being that you can have about 6000 contractuals, 48 counterparties at the same time, with the inability to net across legally-distinct entities in large firms - e.g. you had to move money from Goldman Japan to your firm then to Goldman Asia. The best traders that I know seem to have very good intuition for this kind of problem.

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artemiso View Post
On the other hand, nothing about poker prepares you for the common challenges of trading - one of most important of which being that you can have about 6000 contractuals, 48 counterparties at the same time, with the inability to net across legally-distinct entities in large firms - e.g. you had to move money from Goldman Japan to your firm then to Goldman Asia. The best traders that I know seem to have very good intuition for this kind of problem.

Artemiso, could you clarify this statement? I am unsure what you mean by this in reference to trading. Are you referring to a different from of trading as per what retail traders do?

From my perspective, I believe that it is more difficult to "scale" up in poker as compared to trading. In poker, the opponents directly on the table are the ones that determine your profitability in the game. You are thus able to "pick and choose" your opponents, but I believe the high and nosebleed stakes are full of professionals out to get each other's money.

While I am not saying that trading is any easier than poker, I believe that it is "easier" to scale up in trading, by simply maintaining your current approach and increasing size by leveraging. The markets are essentially the same for almost any size of trade, for if it made a difference, you would be a very rich trader.

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I was talking about the credit counterparty risks. (You really only have 1 counterparty in poker, who's also the market maker...)

Not really, I think the ease of leverage is inconsequential since everyone eventually hits the same hard cap on leverage for operational reasons, not strategy reasons. For instance, your leverage might be capped due to the tax implications of receiving carried interest from a separate GP entity.

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Larry W. Philips Excellent Advice

From Zen and the Art of Poker: Timeless Secrets to Transform Your Game: Larry Phillips: 0091857012902: Amazon.com: Books



RULE #1: Learn to use inaction as a weapon.

RULE #2: Don't get irritated or angered by long session of folding.

RULE #3: If you've been folding a lot, for a long time in the game, and you're starting to think that maybe it's time you got in and played a few hands again -- that's not a good enough reason. Keep folding.

RULE #4: Don't feel like a martyr when folding.

RULE#5: Sometimes others get to play and you don't... But the most important thing is this: you must be comfortable with this - welcome it. Make peace with this idea. Cross your arms and sit back.

RULE#6: To win at poker you must embrace the idea of breaking even... A distaste for breaking even can lead us into the valley of pressing and overplaying and other wrongful activity.

RULE#7: Regard patience as a central pillar of your game and strategy... Don't assign it a secondary or lesser role.

RULE#8: You cannot apply the principles of Zen until you know the game perfectly -- inside and out.

Having the proper attitude of Zen calm and confidence does no good if you do not know the game. Zen will not make up for, or offset, incorrect play. As a result, there is a certain amount of ordinary, old-fashioned work involved in mastering the game -- a certain amount of sweating the white beads before the days of tranquility come along.

RULE#9: Arrive with a system... It is not enough to rely on luck or hope to carry us past the weak parts of our game. These parts must be attended to. The system must be whole and complete... The weak parts must be corrected, or disaster will appear.

RULE#10: Begin by playing tight, but don't forget to stay tight... The important thing is not who possesses the control and discipline at the start of the game, but who possesses it at the middle, the end, and all points throughout.

RULE #11: Don't fall into the "Now Trap."... Players want to win now, today. Results must happen now, in this hand, the one right in front of us... We assign a little more importance to where we are. We make it bigger, more important... But we do this timewise , too - we assign things more importance because they are happening in the present moment... Yet giving greater importance to the present in the game of poker allows us to imagine marginal hands into good hands and good hands into great hands.

RULE#12: Detach yourself emotionally from the game.

RULE#13: Don't be impatient about patience... Your brain is telling you to play patiently while your emotions are saying, "What's taking so long?" These two must be in alignment.

RULE #14: The long run is longer than you think... Playing only the best hands can be frustrating... Anger and irritability can arise. The emotions can be severely tested. This is where Zen comes in.


RULE#15: When you take your emotions out of the game, other players' emotions become visible.

RULE#16: Be wary of pushing forward aggressively when encountering resistance.

RULE#17: Develop a true indifference to the game.

RULE#18: Learn from your mistakes

RULE #19: Make sure you know when you're on a cold streak... You’re not aware of your condition. You’re not stepping back from it and seeing it -- and, more important, not acting on this information. As a result, as cold as you are, you often find yourself right back in there on the next hand, fighting, struggling, betting

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Directional trading as retail traders do it (day trading or swing trading) has definitely similarities to poker. @artemiso is referring to institutional trading, as far as I understand, which is a different game.

The main similarity between trading and poker is that participants in both have to deal with uncertainty. Hence, the similarity regarding psychology and money management.

However, there are also 2 big differences between trading and poker.


A) Rules of the game

In poker, the rules of the game are very clear (52 cards, hand ranks are clearly defined, certain number of betting rounds, etc.). Based on these rules a certain number of strategies can be defined.

In trading, the rules of the game are not defined. If you are not lucky enough to have a mentor whose personality is similar to yours, so that you can copy his/her trading approach, you have to find your own "rules of the game". That's the difficult part in trading and that makes trading more difficult than poker in the beginning, IMO.

However, if you have found your "rules of the game", i.e. your edge, there is the possibility for a far greater edge in trading than in poker.


B) Playing against opponents

As @strikebackfast already pointed out, in poker you play directly against other players and sometimes not only one, but several other players at the same time.

In trading - although you do have many market participants - at the end you can see the market as one participant only (the majority/big money) and - if you do everything right - you do not play against this one participant but try to "piggyback" and bet in the same direction.

In poker you try to play the player and not the hand (i.e. you can get your opponent to fold the better hand by using aggressive play). Obviously, you can't do that in trading (unless you are a central bank ).


Two comments on your list (which is great, btw!), @strikebackfast



strikebackfast View Post

...

Selection of starting hands
...
Applicability to trading: … By virtue of the game, our setups differ one trade to the next. …

I don't know what you mean here exactly. IMO, the setups should always be the same, trade after trade. Otherwise how can you be consistent in your trading? Or do you mean, the setups look slightly different (i.e. no perfection)?

Of course you can have several different setups, e.g. 5 different ones. But you have to look for situations where one of these 5 setups appears, and not "invent" a 6th one on the fly.



strikebackfast View Post

...

The rake will murder your edge if it is too high

...

Applicability to trading: Watch your commissions. This is perhaps the least important out of all that I have stated, ...


Disagree. Many beginning traders think that scalping is the most profitable way to go in trading as a retail trader. But with scalping, the commissions - no matter how small - play a BIG part in your profitability, as they represent a big percentage of your winners.

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Maybe part of the psychology of poker applies to trading in the case of those exceeding discretion but systematic trading resembles little to poker.

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solotrader View Post
Maybe part of the psychology of poker applies to trading in the case of those exceeding discretion but systematic trading resembles little to poker.

Well, even if you trade in a systematic + automated manner, you will experience strings of losses. Your psychology can influence you negatively in such cases. And if you trade systematically, but execute manually, then your psychology plays an even more important role as you could be prone to hesitation or other suboptimal behavior when it's execution time.

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Hi karoshiman.

In reference to your first comment as to the setups must be similar or the same, what I meant was that every trader has their own unique setups, which make the markets an uncertain game. I think its a mere misunderstanding as I believe you posted something to that effect when you compared the rules of poker to trading, which I wholeheartedly agree.

On to "scalping" and commissions, the question to ask is, does your system give you an edge net commissions? If yes, carry on and prosper. Scalping has different meanings from trader to trader. Prop firms and hfts scalp for 1 tick. I agree a retail trader will normal comms will probably never be able to do that profitably (but I may be surprised). Outside of that, as long as a system is net profitable, there are no rules or reason why a retail trader cannot trade frequent signals as and when he likes. He may pay 50% profits to broker and exchange , but at least he is 50% profitable.

My 2 cents!

And yes, I agree trading has a much steeper learning curve to poker for the fact that you do not even know if your method has an edge. For poker, you could use mathematical models to determine probabilities. For trading, you do not know actual probabilities until you forward test it. Back testing is of course suboptimal, but the next best option. Furthermore, psychological flaws will hinder such forward testing , which makes the game doubly hard.

Sent from my Nexus 7 using Tapatalk 2

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