Trading vs. Poker

Discussion in 'Trading' started by JohanLinden, Aug 19, 2011.

  1. Cut and paste from my finance blog:

    Having been a full-time poker player for a few years before I started my recent venture in finance, I have found many similarities between the two occupations.


    When I read the book Poker Wizards, a book interviewing some of the best poker players of all time, I found it very interesting to see how the poker professionals reasoned and how it was related to the financial markets.

    Let us look at what Daniel Negreanu, one of the most acclaimed and well-known poker players of all time, has to say about the traits of successful poker player:

    The one quality that I think is definitely the most important in being a successful player is having good people skills.
    The second most important quality is an aggressive personality.
    Third is discipline.
    The last quality is having a fundamental knowledge of the game, which is the easiest part.

    I could not have agreed more about this list of qualities that makes a successful player. The interesting part though, is that the same thing goes for the players in the stock market or other financial markets. So let us look at these four qualities one by one when it comes to being a successful trader.

    People Skills

    Most definitely one of the most important qualities! A good poker player knows that when the table is tight and people hold onto their money he should be more involved and putting his money in the pot more often. But if many players are involved most of the time, then he plays fewer hands.

    The same thing goes for the stock market. When everyone talks about how good it is to invest in stocks and you hear stock tips just by visiting your local coffee shop, you better stay out. But when people loathe the thought of owning stocks, that is a good time to own stocks.
    stock market psychology and behavioral economic

    Another way of seeing why you need good people skill is to understand what drives the stock prices. In the long-run it is the earnings of a company that leads the way for stock prices, but in the long-run we might have gotten broke already.

    In the short-run it is the hope and fear of people who decides where the stock prices moves. This is what we call market psychology or behavioral economics. Instead of fundamental analysis of the company itself, many successful traders try to measure and use people’s behaviour when analysing the outcome of a trade.

    An Aggressive Personality

    I prefer to call it an unafraid personality. If you assessed the risk of your strategy you must be willing to follow through your plan and not change it just because you are currently losing. When people panic they often take the wrong decision.


    Even if you have the best trading plan in the world and make money 95% av the time, you might lose all those winnings in the last 5% of your trades if you trade inconsistently. You must also have discipline and routines to look over your trading on a regular basis to optimize results, but also take care of your well-being to not lose focus due to stress and other factors.

    Another very important aspect that many people fail to follow is the discipline of game selection. Both poker players and traders alike love their game so much so they often join a game where they do not have an edge instead of waiting for the right opportunity. To sit out and not take a position is many times the right decision. Or to put it another way, to not get involved in losing games makes you a winner in the long-run.

    Fundamental Knowledge of the Game

    It is easy to get a fundamental knowledge of poker. Anyone can get it by reading a few good poker books. In the stock market this is much harder since there is not much scientific evidence about doing the right investment. Are value companies better than growth companies? Is it better to buy a stock with a low P/E? Many people have an opinion but if you ask them for some statistical evidence they think you are a donkey not taking their word for granted.

    It is a big leak for a trader or investor who is using his common sense to take decisions instead of finding a scientific measurable edge. But just as in poker, those bad traders might win in the short-run and complain about being unlucky in the long-run. Do not become one of those people!

    Differences between Trading and Poker

    Finally I would like to point out two differences between trading and poker. In poker, many go with their gut-feeling when taking hard decisions. They might see something in their opponent, a tell, that looks suspicious, and take actions according to that. That is fine! People have had millions of years to evolve skills in reading other people’s subtle expressions. But traders usually do best in avoiding that gut-feeling that usually comes from fear or greed instead of the body language of their opponent.

    The similarity, however, is that you should try switching of your emotional senses in both poker and trading to avoid taking emotionally driven decisions. So much money has been lost in both poker tables and in the stock market for those emotionally driven decision. But your own emotions are one of the toughest challenges to master no matter if you are a trader or poker player.

    My last point regarding the dissimilarities between poker and trading is that trading and the financial markets is much tougher to master than poker. It is much harder to find an edge in trading than in poker. If you have two aces and get your money in before the flop, you are making a good investment. That is a fact. In trading you rarely find those facts.

    I want to finish of with a quote:

    “Poker is like sex. Everyone thinks they are the best, but most people don’t know what they are doing.” -Dutch Boyd

    I hope you enjoyed this article. Feel free to comment!
  2. The stock market is like sex, you get fucked 24/7
  3. emg


    More than 90% of small traders lose. They just lose!!
  4. KevinO


    They just lose!!
  5. Good stuff. Can we get a link to your blog?

    I can add a few more differences that are important. In live poker you know who's at the table with you and who's in the hand. You can act on that information. In trading, you have no idea who's on the sidelines waiting to jump in with orders and "raise". Sentiment is really hard to measure effectively, and in my view is far less important than using good volatility metrics to get a "lay of the land".

    Also you can count on being up against at least a few grandmasters at all times in the markets. Even though most traders are idiots, they aren't slinging around most of the money. This makes the climate brutal. From day 1 the pros and cheats are picking your pockets, and you've got a nasty rake to deal with whether you win or lose (transaction costs, fees, reading material).
  6. T1P1


    If you notice on the back cover - here is a poker book on odds, probabilities and game theory by an author who runs a trading operation and ONLY hires porker players for his traders:

  7. It really does bother me when people who like to gamble feel that those skills transfer to trading. They do not, but it is this ignorance of the most basic finance and economics principals that really takes it to the inexperienced.

    I've not heard of any poker players having any success in trading, and knowing a card game's odds is not the same as assessing the value of an investment.

    Anyone without a background in the fields of economics, finance, or financial economics does not have enough knowledge to know what they are doing. It takes lots of education, and betting against a gambling machine is not the same as investing in the markets. Markets do not take all of your money when you're wrong. Trading is not poker because investing has positive expectancy whereas poker does not. The kelly criterion only applies to card games. It has no bearing on creating a strategy based on risk management because you have to have a strategy to have risk management. You can't just think if I set a stop or use a target or even a trailing stop that that's going to alleviate any mistakes you might make.

    Taking risks is necessary in the markets, and that is substantially its only similarity to poker. Poker is an infantile game of cards. Trading requires substantially more accumen to win than the few "winners" of poker tournaments. While there might be a psychological condition that does not make you fearful when you lose in both, that condition is just part of human nature and any endeavor you try to succeed at when there is livelihood on the line.

    I say if poker were trading, I'd bet who wouldn't win and take the uncovered call by betting the field against favorites. You can't do this in trading because there isn't a mechanism to bet that someone will be wrong. If there was a way to do that, we wouldn't find so many options traders losing nearly all of their wealth in a matter of days if not hours.

    I've enjoyed poker knowing odds, but when it comes to trading, there is no substitute for edge. Having experience managing capital in a poker game does not transfer to having the knowledge necessary to play in the markets. The gentleman's game of investing seems to have been replaced with HFT demonizing even though it is that liquidity that makes the market operate efficiently, it doesn't usually benefit a novice trader who does not have any systematic strategies to base their decisions on.

    I say the dumb poker player might have a college education, but is it one in finance? How much do they understand about macroeconomics and either top/down or bottom/up analysis? Until you've learned these procedures you should know at that point is no different than poker, but in poker at least you can intimidate with large bets whereas there is no intimidation available unless you are mega-wealthy. You should be intimidated whenever you try to compete against large institutions who probably have more knowledge than you but if you piece together a big picture of what the catalysts for a stock are there is a way to devise a set of rules for that particular trade. Rules are algorithms, without them, there's no way to succeed and investing passively eventually is where nearly everybody ends up being unable to manage short term moves and keep their theses in synch with market fluctuations.
  8. You're patty caking around something here so let's call it what it is. Institutions can compute where any client will be liquidated and move the board to tilt that client. They also have first access to the order flow and depth. They can bucket orders, charge commissions, execute large orders in dark pools, position themselves against any customer or hedge it more inexpensively than a retail customer could. They can borrow more inexpensively than any retail trader and charge margin interest to boot. Institutions have access to expensive research and "rumors" that turn into news within 24 hours.

    So all those washed up passive investors failed because they didn't have the tools of an institution according to you. Only the swashbuckling short term traders who come with finance backgrounds and pedigree can beat the banks at their own leveraged short term game despite not having the same tool set and against all odds.

    Sounds like a straw man argument. Maybe you could tell us what you're really trying to say.
  9. You have to have training at least. Formal training. Without it, there aren't many skills from poker that create any confidence with regard to formulating strategies. Poker by itself or the ability to make bets isn't going to help you manage money. Its only similarity is in taking a risk, and anybody can do that.
  10. You sure are making sure to promote Pat around ET. Is this the same guy that said over and over on TL that his great work would never be for sale? And now it can be bought for $1400/yr?

    Shill for the banned UrmaBlume in full effect.
    #10     Sep 13, 2011