There are many similarities between speculating in the financial markets and playing poker. Most participants in either or both endeavors would agree that both are equally challenging of one's discipline and mental acuity. In addition, understanding statistical probabilities as well as knowing who your opponent is when entering the field of battle are essential for victory in the two.
I've often heard professional poker players comment on how they love to spot "soft" or "weak" tables as a source of income. This means that the more inexperienced players there are at the table, the easier it will be for the seasoned pro to take their money. It's really no different in the trading world. Finding the consistent loser or novice trader is how the pros generally generate the bulk of their gains.
There is, however, a skill in knowing who those amateurs are and what behaviors they exhibit to clue you in on their lack of experience. In poker, the individual who shows too much emotion or doesn't truly understand the game will be cleaned out in short order. Similarly, in financial speculation, the participant that makes decisions based on emotion will suffer the same fate as his poker playing counterpart.
In the program I teach, one of the odds enhancers is looking for those emotional responses on a price chart. Upon finding them, the probabilities increase that we will make money if we take the other side of their trade. On February 22, the market opened sharply lower due to the turmoil that had erupted in the Middle East on the long President's Day weekend. There was obviously plenty of nervousness that morning, everyone not sure whether the sell-off would carry over into the day session or if it was just another buying opportunity. In the chart of the NQ (Nasdaq 100 E-mini), I suggested that the shadowed area would provide a low risk buy for the contract in the Futures class that I was leading that morning. Notice who we were buying from: The nervous emotional trader who probably had just got into the market the week prior.
Figure 1
Some of the students did take the trade and made their profit target. Regardless of the outcome, the point I'm stressing here is that just like in poker, the player that didn't know what to do in that situation made the mistake of selling - based on emotion. Or in poker terms, folded too quickly because the more experienced player bluffed him.
Anyone who has ever won a major poker tournament has had the skill to process information quickly and then make immediate decisions with little self-doubt. Those skills are transferable to the trading arena. When a low-risk opportunity is revealed, the trade must be placed, just as when three face cards of the same suit turn up on the first deal - the pro will press his bet. Moreover, when he is outmatched, or the hand that he is dealt has little chance of winning, he will fold quickly, preserving his chips.
When it comes to taking small losses, I often use the poker analogy with students by having them think of a small loss as "just another hand in the deck." Think of how silly it would be to get frazzled after losing just two or three hands at the beginning of any game. Wouldn't you need to play several decks to have the odds work in your favor? What's more, every hand is a brand new hand and with an above average expectancy, it becomes a simple numbers game. Besides, we always have to ante up to have a chance to win the pot.
One important difference between trading and playing poker is the fact that in any game, there is a start and finish. In trading, however, we decide when the game is over. This can become a trap, as a loss isn't a loss until we close the position - so we think.
In conclusion, there are many lessons to be learned from professional card players. Both trading and poker playing involve similar characteristics of risk taking, probabilities and mental discipline. In fact, there are a few, very successful money managers in the world that, at some point in their lives, played cards professionally. One of the more famous, Bill Gross of PIMCO (the world's largest bond fund) says that in order to be a successful investor, "one has to be part card player, and part analyst."
I've often heard professional poker players comment on how they love to spot "soft" or "weak" tables as a source of income. This means that the more inexperienced players there are at the table, the easier it will be for the seasoned pro to take their money. It's really no different in the trading world. Finding the consistent loser or novice trader is how the pros generally generate the bulk of their gains.
There is, however, a skill in knowing who those amateurs are and what behaviors they exhibit to clue you in on their lack of experience. In poker, the individual who shows too much emotion or doesn't truly understand the game will be cleaned out in short order. Similarly, in financial speculation, the participant that makes decisions based on emotion will suffer the same fate as his poker playing counterpart.
In the program I teach, one of the odds enhancers is looking for those emotional responses on a price chart. Upon finding them, the probabilities increase that we will make money if we take the other side of their trade. On February 22, the market opened sharply lower due to the turmoil that had erupted in the Middle East on the long President's Day weekend. There was obviously plenty of nervousness that morning, everyone not sure whether the sell-off would carry over into the day session or if it was just another buying opportunity. In the chart of the NQ (Nasdaq 100 E-mini), I suggested that the shadowed area would provide a low risk buy for the contract in the Futures class that I was leading that morning. Notice who we were buying from: The nervous emotional trader who probably had just got into the market the week prior.
Figure 1
Some of the students did take the trade and made their profit target. Regardless of the outcome, the point I'm stressing here is that just like in poker, the player that didn't know what to do in that situation made the mistake of selling - based on emotion. Or in poker terms, folded too quickly because the more experienced player bluffed him.
Anyone who has ever won a major poker tournament has had the skill to process information quickly and then make immediate decisions with little self-doubt. Those skills are transferable to the trading arena. When a low-risk opportunity is revealed, the trade must be placed, just as when three face cards of the same suit turn up on the first deal - the pro will press his bet. Moreover, when he is outmatched, or the hand that he is dealt has little chance of winning, he will fold quickly, preserving his chips.
When it comes to taking small losses, I often use the poker analogy with students by having them think of a small loss as "just another hand in the deck." Think of how silly it would be to get frazzled after losing just two or three hands at the beginning of any game. Wouldn't you need to play several decks to have the odds work in your favor? What's more, every hand is a brand new hand and with an above average expectancy, it becomes a simple numbers game. Besides, we always have to ante up to have a chance to win the pot.
One important difference between trading and playing poker is the fact that in any game, there is a start and finish. In trading, however, we decide when the game is over. This can become a trap, as a loss isn't a loss until we close the position - so we think.
In conclusion, there are many lessons to be learned from professional card players. Both trading and poker playing involve similar characteristics of risk taking, probabilities and mental discipline. In fact, there are a few, very successful money managers in the world that, at some point in their lives, played cards professionally. One of the more famous, Bill Gross of PIMCO (the world's largest bond fund) says that in order to be a successful investor, "one has to be part card player, and part analyst."
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